Jerome Powell, chairman of the US Federal Reserve, during the International Monetary Fund (IMF) and World Bank Fall meetings at the IMF headquarters in Washington, DC, US, on Thursday, Oct. 16, 2025.
Kent Nishimura | Bloomberg | Getty Images
The easy part for the Federal Reserve on Wednesday will be announcing an interest rate cut when it wraps up its two-day policy meeting. The hard part will be taking care of other details that are presenting substantial challenges to policymaking these days.
Markets are assigning a nearly 100% probability that the Federal Open Market Committee will approve a second consecutive quarter percentage point, or 25 basis point, reduction in the federal funds rate. The overnight lending benchmark is currently targeted between 4%-4.25%.
Beyond that, policymakers are likely to debate, among other things, the future path of reductions, the challenges posed by a lack of economic data and the timetable for ending the reduction in its asset portfolio of Treasurys and mortgage-backed securities.
Underlining all of those deliberations will be a growing divergence of opinion over what the future holds for monetary policy.
“They are at a moment in the policy cycle where there’s genuine disagreement between people who are thinking we will probably cut rates but I’m not ready to cut again just yet, and people who think even though there’s risks, it’s time to do more now,” said Bill English, a Yale professor and the Fed’s former director of monetary affairs. “There’s dissent between people who want to cut now, and people who want to wait and see a bit more.”
Judging by recent statements and prevailing Wall Street sentiment, newly appointed Governor Stephen Miran is likely to dissent in favor of a bigger cut, as he did at the September FOMC meeting.
At the same time, regional Presidents Beth Hammack of Cleveland, Lorie Logan of Dallas and Jeffrey Schmid of St. Louis have expressed reluctance to go much further on cuts, though it’s far from clear whether they will vote against a cut this week. Only Miran, who wanted a half-point reduction, actually dissented in what was an 11-1 committee vote last month to cut by a quarter point.
Left to try to straddle the difference will be Chair Jerome Powell, who in a recent speech gave an implied nod to an October cut when he expressed worry over the state of the labor market.
Investors will look to the central bank chief, who will leave the position in May 2026, for guidance on the prevailing sentiment.
“I would expect him to try to walk a middle ground, not tip his hand necessarily, on December,” English said, referring to the next policy meeting after this one. “I don’t think he wants to be locked into a rate cut in December. But on the other hand, it does seem like he’s worried about the labor market and about the outlook for real activity, so he doesn’t want to come across as hawkish.”
Markets currently also are pricing in a near-certainty of a December reduction, according to the CME Group’s FedWatch tool, so it would take a lot do dissuade Wall Street from anticipating more Fed easing.
Worries about jobs
One big reason officials are in the mood to lower is concern over the labor market. Even with an absence of data, there are clear signs that inflation is slowing even if layoffs, judging by state-level jobless claims submissions that are still ongoing despite the federal shutdown, do not appear to be accelerating.
In fact, worries over jobs could keep the Fed cutting well into 2026, said Luke Tilley, chief economist at Wilmington Trust.
“We expect 25 [basis points Wednesday] and then again in December, and then again in January and March and April,” Tilley said. “Then that would bring them down to what we think of as the neutral range to 2.75% to 3%.”
Fed officials in September indicated, through the “dot plot” of individual members’ expectations, that they won’t get to a rate that neither pushes nor restrains growth — the so-called “neutral” rate — until 2027, and even then it will be a quarter point above where Tilley sees.
However, he thinks the Fed won’t have any choice but to react to labor market weakness, particularly as it poses a challenge to surprisingly strong economic growth seen in the second half of this year.
Worries over jobs have taken more of the Fed’s focus even as inflation remains well above the central bank’s 2% target. The Bureau of Labor Statistics reported last week, in the only official data release during the shutdown, that the annual inflation rate as measured by the consumer price index was stuck at 3% in September.
Lack of data challenge
Outside of the CPI report, central bankers face the additional challenge of the data blackout that has accompanied the government shutdown.
“It’s hard to make policy to achieve two goals … when you’re not getting data about about at least one of them,” Tilley said, referring to the Fed’s dual mandate to maximize employment and keep prices stable, and the absence of the September nonfarm payrolls report due to the shutdown.
“I expect that to be communicated as more uncertainty about the path forward, that they have to be ready to pivot and hold rates, if need be, or to reduce them faster when they finally do get data,” Tilley said.
Finally, markets will be looking for more definitive answers on when the Fed will stop reducing its $6.6 trillion balance sheet, most of which is in Treasurys and mortgage-backed securities. Nicknamed quantitative tightening, or QT, the process has entailed allowing proceeds from maturing securities to roll off rather than being reinvested as usual.
In a recent speech, Powell indicated the time is getting closer to where the Fed will want to stop QT. While financial conditions are largely still solid, there have been some small signs lately that short-term markets are tightening up. With the Fed’s overnight funding facility nearly drained, officials are likely to signal this week that QT is in its final stages.
Market commentary was split over whether the Fed will announce the actual end of the program, or signal a future date when it will cease.
“There are signs that they’re getting close to bottom, so to speak, in terms of getting through ample reserves and actually getting some tightness and liquidity. So that’s why I would expect an announcement, if not action,” Tilley said.
