Key Takeaways

The Federal Reserve is expected to implement its third consecutive rate cut on Wednesday while signaling caution about future policy moves. The Federal Open Market Committee (FOMC) remains divided: Some members advocate further easing to prevent labor market deterioration, while others argue current policy is sufficiently accommodative and additional cuts risk fueling inflation. Beyond the rate decision and policy statement, investors will closely monitor updates to the "dot plot" of individual rate projections and revised economic forecasts.

The Federal Reserve is poised to deliver its third straight rate cut this week, alongside warnings about its future policy trajectory. Markets now widely anticipate a 25-basis-point reduction, which would lower the benchmark rate to a 3.5%-3.75% range. However, uncertainties persist.

FOMC divisions have intensified: One faction supports preemptive cuts to counter labor market weakness, while another warns excessive easing could reignite inflation. This has made a "hawkish cut" the meeting’s buzzword—where the Fed cuts rates but signals limited appetite for further reductions.

Bill English, former Fed head of monetary affairs and current Yale professor, predicts: "The most likely outcome is a hawkish cut—they’ll ease but emphasize in communications that the cycle may be complete." He expects the Fed to convey that policy is now "appropriately calibrated" absent major economic shifts.

The committee’s stance will emerge through its statement and Chair Jerome Powell’s press conference. Analysts expect language adjustments, potentially reviving 2022 phrasing about "the extent of additional policy firming." Goldman Sachs forecasts signals of "higher hurdles for future cuts."

Investors should watch three key elements: 1. Updated "dot plot" projections 2. Revised GDP, unemployment, and inflation forecasts 3. Potential balance sheet adjustments, including a possible shift from ending runoff to resuming bond purchases

Goldman’s David Mericle notes Powell may reinforce higher cut thresholds while acknowledging dissenting views. The October meeting saw two opposing votes, and Mericle expects similar divisions—including "soft dissent" reflected anonymously in the dot plot.

Despite supporting a third cut, Mericle acknowledges valid arguments on both sides. English adds: "This meeting is tough—multiple dissents are likely. Consensus is always hard given differing views on the economy, especially now."

Recent data shows mixed signals: Job openings held steady in October, but hires fell by 218,000 while layoffs rose by 73,000. Meanwhile, September core PCE inflation eased to 2.8% year-over-year—below expectations but still above the Fed’s 2% target.

Inflation concerns linger despite claims it has "disappeared." Tariffs and other factors have kept prices elevated, prompting caution among policymakers. Former Cleveland Fed President Loretta Mester stated on CNBC: "Inflation remains well above target, and not just due to tariffs. Restrictive policy must stay to ensure sustained cooling."

Still, Mester expects Wednesday’s cut to conclude the easing cycle, citing New York Fed President John Williams’ November speech as a turning point in market expectations. She warns: "I worry more about sticky inflation now—the Fed should signal slower future cuts."

Beyond rates, the Fed may clarify its balance sheet strategy. After hinting in October at ending quantitative tightening (QT), some anticipate a limited bond-buying restart—though not full-scale QE—given ongoing funding market pressures.