^{Photo: Bloomberg.com}

The Federal Reserve enters one of its most closely watched meetings of the year this week, with markets nearly unanimous in expecting another quarter-point interest rate cut. Yet beyond the headline move, the central bank faces complex questions about how far and fast to continue easing monetary policy amid an uncertain economic landscape.

Another Cut on the Way

The Federal Open Market Committee (FOMC) is widely expected to approve a 25-basis-point reduction, marking its second consecutive cut. That would bring the federal funds rate to a target range of 4.00% to 4.25%, its lowest level since early 2023. Futures markets tracked by the CME FedWatch tool show traders pricing in a 99% probability of such a move.

But the rate decision is just one part of a broader debate now emerging inside the Fed: when to pause, how to respond to weakening labor data, and when to halt the ongoing reduction of the Fed’s $6.6 trillion balance sheet—a process known as quantitative tightening (QT).

Divisions Inside the Fed

Diverging opinions are now shaping the Fed’s internal dynamics. Some policymakers believe additional cuts are necessary to cushion the economy from slowing job growth, while others warn that premature easing could reignite inflationary pressures.

Former Fed Director of Monetary Affairs Bill English described the tension: “There’s dissent between those who want to act now and those who prefer to wait for more clarity.”

At the September meeting, Governor Stephen Miran dissented in favor of a larger 50-basis-point cut. Meanwhile, regional Fed presidents Beth Hammack (Cleveland), Lorie Logan (Dallas), and Jeffrey Schmid (St. Louis) have expressed skepticism about further easing, though none have yet indicated plans to vote against it.

Powell’s Balancing Act

All eyes will be on Chair Jerome Powell, whose leadership ends in May 2026, as he attempts to strike a delicate balance. Powell recently acknowledged concerns about a cooling labor market, signaling openness to further cuts if job losses accelerate. However, he’s expected to avoid committing to another cut in December, leaving room to maneuver depending on economic conditions.

Market sentiment, however, suggests another reduction is almost inevitable. Wall Street currently assigns a 96% probability to another 25-basis-point cut in December, reflecting investors’ confidence that the Fed will continue its easing cycle well into 2026.

Labor Market Worries

While inflation has cooled to around 3% year-over-year, employment figures are showing early signs of stress. Even with limited official data due to the ongoing federal government shutdown, state-level jobless claims hint at weakening conditions across several regions.

Economists like Luke Tilley, Chief Economist at Wilmington Trust, expect the Fed to stay on a consistent cutting path. “We anticipate 25 basis points this week, followed by additional cuts in December, January, March, and April,” he said, predicting that rates could eventually settle in the “neutral” range of 2.75% to 3.00% by mid-2026.

That’s significantly below the 3.25% median neutral rate projected by Fed officials in their latest “dot plot” forecasts.

Inflation vs. Data Shortages

The biggest challenge for policymakers may not be inflation—it’s the lack of timely data. With the September jobs report missing due to the federal shutdown, the Fed is essentially flying blind.

“It’s hard to make policy when you’re not getting data about one of your two mandates,” said Tilley, referencing the Fed’s goals of stable prices and maximum employment. “They have to be ready to pivot quickly once the data resumes.”

Quantitative Tightening Nears Its End

Another issue on the table is the fate of the Fed’s balance sheet reduction program. Since 2022, the central bank has allowed proceeds from maturing Treasury and mortgage-backed securities to roll off without reinvestment—part of its effort to tighten liquidity.

Now, with short-term funding markets showing signs of strain, Powell recently hinted that QT may be nearing its conclusion. Analysts expect the Fed to either announce a formal end to the program or signal that the process will wrap up in early 2026.

“There are indications that the system is approaching ample reserves,” Tilley noted. “It wouldn’t be surprising if the Fed makes an announcement—or at least prepares the markets for one.”

What Comes Next

As the Fed meets amid conflicting economic signals—steady inflation, slowing job growth, and incomplete data—the path forward remains uncertain.

What is clear, however, is that the central bank’s decisions over the next few months will shape the trajectory of borrowing costs, corporate investment, and consumer confidence well into 2026.

Markets, businesses, and households alike will be watching closely for Powell’s tone on Wednesday—not just the size of the cut, but what it signals about the direction of U.S. monetary policy in an economy still finding its post-pandemic balance.