The Federal Reserve is expected to continue to cut interest rates this week, but internal divisions may hinder the path to further easing.

The Fed is expected to cut interest rates for the second consecutive time this week to support the sluggish job market. However, if someone proposes to continue the easing cycle after October, they may face opposition from some officials, as some officials still have concerns about inflation. Although the dovish camp of the Fed currently holds the upper hand in debates and has successfully pushed for rate cuts, another group of policy makers is worried that the rate cuts may be too aggressive. The latest consumer price data released last Friday showed that in September, the core inflation rate in the US dropped to its lowest level in three months. While this data provides support for the Fed's rate-cutting plan, the overall cooling of inflation has reached a standstill, and does not provide strong grounds for the argument of "further multiple rate cuts". Nicole Selvar, an economist at Wells Fargo, said, "This will keep the Fed in a dovish stance in October, but the fundamentals of inflation have not actually changed." Fed policy makers have been in a wait-and-see mode this year, waiting to assess the impact of tariffs and other policy changes on the economy. After a significant slowdown in summer hiring activities, officials decided in September to cut the benchmark interest rate by 25 basis points, with two more cuts expected before the end of the year. Since that meeting, the latest job market data (some of which were provided by private institutions to fill the information gap caused by the government shutdown) has not brought much positive signals. Earlier this month, Fed Chairman Jerome Powell said that the job market is "actually significantly weak" and that there are "significant downside risks". As a result, the futures market has almost fully priced in the expectation of a 25 basis point rate cut next week, with another cut expected in December and a third cut in March next year. In the $29 trillion US Treasury market, investors have gained excess returns this year by expecting Fed rate cuts, marking their best annual performance since 2020. This month, the market continued its rally on expectations of further rate cuts, with a 1.1% gain. Vishal Kanduja, head of the Morgan Stanley Investment Management All Market Fixed Income team, said, "It is extremely difficult to deviate from the market's pricing expectation of 50 basis points rate cuts over the next two meetings. It is difficult to find a rationale for going against market expectations." Last Friday's Consumer Price Index (CPI) report did not change traders' expectations of rate cuts. The rise in the US Treasury market pushed the 10-year US Treasury bond yield (a benchmark for borrowing costs such as credit cards and car loans) below 4%, close to levels in April this year. Stephen Stanley, Chief Economist for North America Capital Markets at Santander Bank, pointed out, "The financial markets have taken an extremely aggressive stance, yet the Fed leadership has not given any clear signals in response to this." However, opposition may come from several regional Federal Reserve Bank presidents, including Albert Muller from the St. Louis Fed, Jeffrey Schmidt from the Kansas City Fed, and Beth Hammack from the Cleveland Fed. The interest rate forecasts released in September show that out of 19 Fed policymakers, 9 believe there will be at most one more rate cut this year, with 7 even leaning towards no further cuts. Inflation pressures caused by non-tariff factors Some officials in this camp acknowledge the slowdown in hiring and support the rate cut in September, but they also point out that the significant decrease in immigrant numbers has led to a sharp decrease in labor supply and demand simultaneously. This means that the required number of new jobs to maintain the unemployment rate steady has decreased. Some officials estimate that the so-called "employment balance growth rate" is approaching the current job growth rate - an average of 29,000 new jobs in the US per month over the past three months. Their concerns about inflation are also gradually increasing. Although tariffs have not triggered the significant price increases that many anticipated, the ongoing implementation of new tariff measures has raised concerns that their impact may be more lasting. In addition, there is evidence that, in addition to areas directly affected by tariffs, other categories are beginning to experience upward pressure on prices. Beth Hammak of the Cleveland Fed, who will have voting rights on the Fed's rate-setting committee next year, has expressed concern in recent times about soaring prices in the service sector. While the core service inflation excluding housing temporarily fell at the beginning of 2025, its year-on-year growth has exceeded 3% for four consecutive months. Several officials also point out that the inflation rate has remained above the Fed's 2% target for over four years, and it is not expected to reach this target again until 2028. Prolonged high inflation above the target poses a risk of a significant increase in long-term inflation expectations - a change that will cause policymakers to be highly cautious. Credibility of Fed policy Philadelphia Fed President Anna Paulson said in her first policy speech this month, "The stability of long-term inflation expectations is an important proof of the credibility of monetary policy. Completing the task of controlling inflation and completely reducing the inflation rate back to 2% is crucial." The government shutdown has further complicated the difficulty for Fed officials to assess the economic situation due to the interruption of official data releases. Veronica Clark, an economist at Citigroup, said that this may mean that officials will continue to follow the path set in the September rate expectations - two more rate cuts this year and only one more next year. Clark said, "The internal divisions within the Fed are still large, but currently there is no information that can truly change the stance of any party. This is likely to become one of the core messages of the meeting: they currently lack clear enough clues to judge the future direction of the economy." Even Christopher Waller, a Fed governor who was the first to point out the slowing of hiring in the summer, recently called for caution in the rate-cutting issue, noting the contradiction between strong economic growth and a weak job market. Waller said in a speech earlier this month, "The situation will eventually change. Either economic growth slows down, matching the weak job market; or the job market recovers, matching the strong economic growth."