Cut Or Hold? US Fed Chair Powell Navigates Divided FOMC As Dollar Stays Muted Near 100-Mark

The US Federal Reserve will unveil the ninth monetary policy meeting of 2025 on Dec. 9, amid a largely dividend rate-setting panel of the central bank. The dividend Federal Open Market Committee (FOMC) cut the federal funds range last month even as policymakers cautioned that doing so could risk the muted inflation and a loss of public trust in the US Fed.

The previous meeting added to growing doubts that the US Fed would deliver another reduction in borrowing costs at its December 9-10 gathering, with traders now giving that scenario only about a one-in-four chance. According to Reuters, traders are now pricing in an 81% chance of a cut next month, up from 42% a week earlier, CME FedWatch showed

"Many participants were in favor of lowering the target range for the federal funds rate," the minutes from its October 28-29 meeting stated, while noting some members of the group also would have been satisfied if the FOMC had left rates steady in the meeting.

Several other policymakers opposed the rate cut outright, and "expressed concern that progress toward the US Fed's 2% inflation objective had stalled while also noting that longer-term inflation expectations could rise should inflation not return to 2% in a timely manner."

"Most participants," however, noted that further policy rate reductions could add to the risk of higher inflation becoming entrenched or could be misinterpreted as implying a lack of policymaker commitment to the 2% inflation objective," the minutes added.

Analysts said the minutes showed the divisions Fed Chair Jerome Powell will have to mediate without the data reports typically at the center of the central bank's policy debates. Some also believe that Powell's allies have laid the groundwork for him to push through a rate cut during the Dec. meeting.

"The decision is likely to be contested in an increasingly divided rate-setting committee, especially as a lack of clear data points for October leave the US Fed flying blind into its final meeting for the year," said Jigar Trivedi, Senior Research Analyst at Reliance Securities.

Powell is likely to weigh two options – one involving an immediate rate cut before adopting a more cautious stance for further decisions, while the alternative is to hold rates steady and reassess in January. New York Fed President John Williams has said the Fed had reason to cut rates now and prevent further weakness in the labor market.

"A December rate cut is also in line with the agenda Powell set in August, with the Fed now having cut rates in two consecutive meetings. But other Fed members have struck a far more cautious stance on a cut, arguing that inflation risks still persist, while the labor market is still resilient enough to not warrant immediate easing," said Trivedi.

Additionally, Fed Governor Christopher Waller said on Monday that the job market was weak enough to warrant another quarter-point rate cut in December, though action beyond that depended on a flood of data that was delayed by the federal government shutdown.

The dollar index was muted near 100 on Tuesday, remaining sideways for a fourth straight session as dovish remarks from Federal Reserve policymakers strengthened expectations for a near-term interest rate cut. 

This comes as Fed Governor Waller signaled support for a December cut, citing rising labor market risks and echoing comments from San Francisco Fed President Mary Daly and New York Fed President John Williams.

Waller also noted that policy decisions next year will depend heavily on a wave of delayed data following the government shutdown. Markets are now pricing in an 81% chance of a 25 basis point reduction next month, up sharply from 42.4% a week ago," said Trivedi of Reliance Securities.

However, Fed officials remain divided on what might come next as the central bank still lacks a full suite of data. This underscores the challenge the market faces in pricing in near-term rates in the absence of economic data, due to the longest-ever US government shutdown, which ended on Nov. 14.

Investors now look ahead to a series of US economic releases this week for further guidance, including retail sales, producer price index, durable goods orders and weekly jobless claims. The US dollar has traded flat to slightly weaker against other major currencies so far this month.

The US dollar index, a measure of the greenback against its major counterparts, last fell 0.15% at 100, after remaining stable and holding onto its gains from last week when the index rose nearly 1% in early trading.