Fed faces deepest split in years as December decision looms

FOMC more divided than at any time in years

​The Federal Reserve (Fed) heads into this week's meeting with policymakers more split than at any point in recent memory. At least five voting members have expressed doubts over further easing, raising the prospect of multiple dissents.

​The Federal Open Market Committee (FOMC) hasn't seen three or more dissents since 2019. That was during the brief period when Trump was openly pressuring Powell to cut rates, creating an uncomfortable political backdrop. This time the division appears more fundamental.

​The split could reveal how much independence incoming regional presidents intend to assert. It also signals the Fed's evolving internal dynamics as the economic outlook becomes murkier and the trade-offs between growth and inflation less clear-cut.

​For markets, the dissent count matters. A single dissent is routine and easily dismissed. Multiple dissents suggest genuine uncertainty about the policy path, which tends to increase volatility across forex trading and equity markets.

​Market pricing still assumes a cut despite growing doubts

​Futures put the probability of a 25bp reduction at around 84%, a comfortable majority but not the near-certainty seen at some previous meetings. Several analysts warn the risk of no move is underappreciated given recent Fed commentary.

​Hawkish pushback from officials has been notable. The tone has shifted from concerns about labour market weakness to worries about sticky inflation and the need to retain policy flexibility. That's a meaningful change in emphasis.

​The gap between market pricing and Fed rhetoric creates potential for disappointment. If Powell signals greater caution on future cuts, or if dissents pile up, markets could reprice expectations sharply. That would likely support the US dollar and weigh on equities.

​Conversely, if the Fed cuts and Powell strikes a dovish tone, the current pricing could prove too conservative. But the balance of risks seems tilted towards a more hawkish outcome than markets expect.

​Powell's guidance on 2026 matters more than December move

​With a cut largely assumed, investors say guidance on the 2026 path matters more than the December decision itself. The key question is how Powell frames the balance between labour market risk and sticky inflation.

​Recent data hasn't provided clear direction. Inflation remains above target, but growth is cooling and the labour market shows signs of softening. This creates a genuine dilemma for policymakers trying to calibrate the pace of easing.

​Powell's press conference will be scrutinised for any hints about how many cuts remain in the cycle. Markets are currently pricing a gradual easing path, but if the Fed signals a pause after December, that would represent a significant hawkish shift.

​The dot plot will also draw intense attention. Any upward revision to the longer-run neutral rate estimate would suggest the Fed believes it has less room to ease than previously thought. Those looking to trade online should watch for these subtle shifts in language.

​Data fog complicates the Fed's decision-making

​The 43-day government shutdown has delayed key labour numbers, leaving the Fed without an updated unemployment rate. This creates unusual uncertainty at a critical juncture for policy decisions.

The Job Openings and Labor Turnover Survey (​JOLTS) data on Tuesday may take on unusual significance as a result. Job openings provide an alternative window into labour market strength, though they're a less timely indicator than the monthly payrolls report.

​The Fed has faced data gaps before, but rarely at a moment when the labour market debate is so central to the policy outlook. This could make Powell more cautious about signalling a clear forward path.

​For traders, this data fog adds another layer of uncertainty. Without a clear employment picture, the Fed may lean more heavily on inflation trends when assessing the appropriate policy stance. That could mean fewer cuts than markets currently expect.

​Political uncertainty adds pressure on long-end yields

​Uncertainty over Powell's successor adds another layer for Treasury markets. Concerns that a politically driven appointment could pressure the long end of the curve are beginning to surface among fixed income traders.

​Powell's term as Chair expires in 2026, though he remains a Governor until 2028. The question of who replaces him matters for Fed independence and credibility, particularly if inflation pressures persist.

​A more politically compliant Chair could raise questions about the Fed's commitment to price stability. That would likely see term premium rise at the long end as investors demand compensation for increased policy uncertainty.

​For now, these concerns remain in the background. But they're starting to feature in strategist notes and could become a more prominent theme as the succession debate heats up next year.