Fed Poised for Third Rate Cut Amid Conflicting Economic Signals
Markets anticipate a quarter-point reduction as a cooling labor market clashes with persistent inflation concerns, deepening divisions within the central bank.
The Federal Reserve is widely expected to deliver its third consecutive interest rate cut on Wednesday, a move aimed at bolstering an economy showing definitive signs of a cooling labor market. Yet the decision is set against a backdrop of deep divisions among policymakers who are weighing conflicting economic data and the path forward for monetary policy in 2026.
Markets have almost fully priced in a quarter-percentage-point reduction in the federal funds rate, which would lower the benchmark to a target range of 3.50% to 3.75%. The CME FedWatch Tool, a key barometer of market expectations, indicates an 87% probability for such a cut, reflecting investor conviction that the central bank will act to preempt a sharper economic slowdown.
The primary catalyst for the anticipated cut is the weakening U.S. labor market. The ADP National Employment Report for November signaled a contraction in private sector employment, with a surprising decline of 32,000 jobs. The report highlighted that the weakness was concentrated in small businesses, which shed 120,000 positions, suggesting mounting pressure on smaller enterprises. This followed U.S. Bureau of Labor Statistics data showing the unemployment rate had ticked up to 4.4% in September.
However, the picture is not entirely clear. Contradicting the ADP figures, the most recent Job Openings and Labor Turnover Survey (JOLTS) showed an unexpected rise in job openings to a five-month high of 7.67 million. This resilience, combined with inflation that remains stubbornly above the Fed's 2% target, has fueled a significant debate within the Federal Open Market Committee (FOMC).
This divergence in data has intensified an already "unusually high degree of division" among Fed officials, according to analysis from IG. While a dovish contingent appears focused on the softening employment trend as a reason to ease policy, more hawkish members remain concerned that cutting rates prematurely could reignite inflationary pressures. The decision on Wednesday could therefore see one or more dissenting votes, a rare but telling sign of the internal friction.
Investors will be closely scrutinizing the language of the FOMC's official statement and, more importantly, the subsequent press conference with Chair Jerome Powell. Any guidance on the committee's willingness to implement further cuts in 2026 will be critical for market direction. The Fed's updated economic projections, or "dot plot," will also be released, providing a clearer view of where individual members see rates, inflation, and unemployment heading.
As the final FOMC meeting of 2025 concludes, the market's reaction will hinge not just on the widely expected rate cut itself, but on the central bank's success in navigating the complex economic crosscurrents and communicating a clear path forward.