Powell has backing for 2025 rate cuts and then things get cloudy

The Federal Reserve is ready to cut interest rates again this month, because right now a weakening job market outweighs inflation fears. But that balance may not hold for very long.

There’s a sizable Fed contingent calling for caution – pointing to prices that have been running above-target for years and still face upward pressures. Even some policymakers who are open to two more rate cuts this year aren’t confident projecting that trajectory any further ahead.

All this means the path for borrowing costs into 2026 is much less clear than the steady downward drift that financial markets are currently betting on.

The economic data isn’t helping, because it points in different directions – growth and consumer spending are resilient while hiring has slowed. The government shutdown, which has frozen a whole swath of key releases, only makes matters worse. And the weekly commentary from Fed officials is turning into an increasingly fractious debate.

Powell’s jobs warning

The task of herding these diverging positions into policy falls to Chair Jerome Powell, who says there are dangers in delaying a move to address employment risks – signaling a cut is coming on Oct. 29, the Fed’s next decision day.

Anemic job gains over the past few months, coupled with massive downward revisions to earlier numbers, have upended the widely held view that US labor markets were in robust health. The new go-to label is a low-hiring, low-firing economy, with little sign of large-scale layoffs. Powell says this equilibrium may prove fragile.

“You’re at a place where further declines in job openings might very well show up in unemployment,” he told an economics conference on Tuesday.

His comments were taken as cementing a quarter-point cut this month. Traders in futures markets already expected that and are convinced there’ll be another one in December. If they’re right, it would match the median projections penciled in last month by Fed officials.

Things will likely get more complicated after that – or perhaps even sooner, according to former St. Louis Fed President James Bullard.

“October is going to happen,” Bullard said. But while a follow-up cut remains likely, “the fact that inflation is remaining high and the fact that growth looks pretty strong is putting December at risk.”

The hawkish case was strong enough to persuade eight of 19 Fed officials to project that there’ll be no further rate cuts next year. Many see a lingering tariff threat to consumer prices, highlighted again by the latest US-China flareup.

“It’s been 54 months since inflation was at or below target,” said Tim Mahedy, a former senior adviser at the Federal Reserve Bank of San Francisco. “There are no doubt risks to the labor market, but as the administration proved last week with the announcement of potentially more tariffs, there are also risks to the inflation side of the mandate, especially if the economy keeps chugging along.”

Inside the Fed, the push for rate cuts has been led – at least until recently – by Governors Christopher Waller and Michelle Bowman, who both cite jobs as their top worry.

Now there’s a new voice in the central bank’s internal debate: Stephen Miran, who was appointed as a Fed governor by Donald Trump and took up his seat last month while on unpaid leave as one of the president’s top economic advisers. Miran has urged a rapid series of half-point cuts, but he remains an outlier for now.

One thing that makes next year’s rate path harder to call is that things will change inside the Fed, as well as in the US economy.

Powell’s term as chair ends in May. Trump says he’ll pick a successor committed to cheaper borrowing costs, and he’s sought other ways to push the central bank in that direction. But two regional Fed presidents due to rotate into voting positions next year – Cleveland’s Beth Hammack and Lorie Logan of Dallas – are among those who’ve signaled caution over further rate cuts.

Ultimately, it’ll be the balance of employment and inflation risks that shapes the 2026 policy debate – and that may result in a Fed that moves more cautiously than investors now expect, according to Stephanie Roth, chief economist at Wolfe Research LLC.

“It’s likely the Fed ends up cutting less than what’s priced into markets,” she said. “That may be realized early next year as the economy runs a bit hot.”