US Fed appears set for 3rd rate cut amid sharp divide

WASHINGTON — The US Federal Reserve was expected to deliver a further interest rate cut on Wednesday despite divisions among its ranks, with chief Jerome Powell's ability to secure support from fellow policymakers put to the test.

Financial markets expect a third straight reduction of 25 basis points, bringing levels to a range between 3.50 percent and 3.75 percent. This would be the lowest in around three years.

But the divisions within the Fed have grown even as policymakers voted to slash rates twice in recent months to boost the weakening employment market.

"We look for at least two dissents in favor of no action and one in favor of a larger cut," said Michael Feroli, chief US economist at JP Morgan.

"There are almost equally compelling reasons to cut and to hold," he said in a recent note.

The Fed's rate-setting committee consists of 12 voting members, including seven members of the board of governors, the New York Fed president and a rotation of reserve bank presidents, who take a majority vote in deciding the path of rates.

Powell noted in October that inflation separate from President Donald Trump's tariffs is not too far from officials' 2-percent target.

But the costs of goods have risen on the back of Trump's wide-ranging levies this year, and some officials are cautious that higher prices could become persistent.

The Fed pursues maximum employment and stable prices as it decides the path of interest rates, although the goals can sometimes be in conflict. Lower rates typically stimulate the economy while higher levels hold back activity and tamp down inflation.

Powell will likely be able to "persuade several hesitant policymakers to support a third consecutive 'risk management' rate cut," said EY-Parthenon chief economist Gregory Daco.

This week's gathering is the last before 2026, a year of key changes for the central bank — including the accession of a new chief and tests of its independence as political pressure mounts.

In an interview with Politico published on Tuesday, Trump signaled that he would judge Powell's successor on whether they immediately cut interest rates.

Asked if this was a "litmus test "for his handpicked candidate, Trump responded "yes".

Powell's term as Fed chair ends in May 2026, and Trump has hinted that he wants to nominate his chief economic adviser Kevin Hassett to the top post.

Hassett currently chairs the White House National Economic Council, and appears to be in lockstep with the president on key economic questions facing the Fed.

If appointed, however, Hassett could also face pressure from financial markets to diverge from the White House on interest rates — particularly if inflation worsens.

Agencies Via Xinhua