Fed Minutes Reveal Deep Divisions Over December Rate Cut as Officials Weigh Inflation Risks and Labor Weakness

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Summary:

The U.S. Federal Reserve’s December meeting minutes show a sharply divided committee, with several officials viewing the latest rate cut as a "finely balanced" decision....

Rate Cut Approved Amid Disagreement Over Economic Trajectory

The minutes from the Federal Reserve’s December 9–10 policy meeting reveal a central bank at a crossroads. While the quarter-point rate cut to a 3.5%–3.75% target range was ultimately approved, it came only after what the Fed described as a "deeply nuanced debate" over the appropriate response to recent economic signals. Even among those who backed the cut, some acknowledged that the choice was "finely balanced" and could have just as easily gone the other way.

This was the third consecutive rate reduction of 2025, enacted in response to a slowdown in monthly job creation and a gradual rise in unemployment. Yet the minutes reflect a growing divergence within the Federal Open Market Committee (FOMC) on how best to proceed, with officials now facing conflicting economic signals: inflation that remains above target and a labor market that is losing momentum.

Dissent on Both Sides Reflects Unusual Policy Split

Six policymakers opposed the rate cut in the Fed’s updated economic projections, and two of them officially dissented in the final vote highlighting an increasingly rare duality of disagreement within the central bank. The division was not along traditional hawkish-dovish lines; rather, it reflected differing assessments of inflation persistence versus employment deterioration.

Some participants justified the cut as a forward-looking move to prevent further labor market weakening. Others argued that progress toward the 2% inflation goal had stalled, warning that easing policy too soon might reignite price pressures. This internal divide on both timing and magnitude of future cuts has become more pronounced, marking the second consecutive meeting where such cross-cutting dissents occurred.

Fed Seeks Data Clarity Amid Gaps from Government Shutdown

Further complicating policy decisions was the 43-day U.S. government shutdown, which delayed the release of critical economic indicators and contributed to the uncertainty surrounding the Fed’s inflation and labor assessments. The minutes noted that the "lack of official data" made it harder for some members to fully justify or reject the rate cut, reinforcing the desire among skeptics to wait for a fuller dataset before making further moves.

The Fed will next receive fresh inflation and jobs data on January 9 and January 13, respectively, and these readings are likely to play a decisive role in shaping the committee’s stance for its next meeting on January 27–28.

Rates Likely on Hold as Fed Seeks Clearer Signals

While December's rate cut implies a continued tilt toward accommodation, the policy language and forward guidance have become more neutral, suggesting that further cuts are not guaranteed. The Fed’s projections indicate only one rate cut for 2026, and the committee appears inclined to pause unless clear evidence emerges of either accelerating unemployment or renewed disinflation.

This wait-and-see approach reflects a causal reasoning structure within the Fed: interest rate policy will not lead market expectations but will react to confirmed macroeconomic shifts. If inflation resumes its descent, further easing becomes likely. Conversely, if price pressures persist and employment stabilizes, the Fed may opt for a prolonged hold.

Fed Faces a Narrow Path Between Risks in 2026

The December FOMC minutes illustrate a central bank caught between the crosscurrents of softening labor markets and stubborn inflation. While the latest rate cut aims to safeguard growth, the divided views signal that the Fed is increasingly cautious about missteps that could either undercut recovery or reignite inflation.

Heading into 2026, monetary policy is likely to remain data-dependent and finely calibrated, with the Fed reluctant to commit to any trajectory in the absence of clearer macroeconomic direction. For markets and households alike, uncertainty remains the prevailing theme as the central bank navigates its dual mandate in a post-pandemic, post-inflation economy.

Source: Rueters

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