Economists: The Federal Reserve will cut interest rates by 25 basis points next week, but voting will be divided and interest rates will be cut twice next year.

A recent survey of economists showed that the Federal Reserve is expected to cut interest rates again next week to prevent the risk of a sharp deterioration in the labor market. At the same time, the median forecast of respondents indicates that the Fed will pause after cutting rates next week and will resume rate cuts in March 2026, with two 25 basis points cuts expected throughout the year. Most economists expect the Fed to cut rates twice next year This survey result is in line with the market's expectations for Fed rate cuts. According to CME Group Inc. Class A's "FedWatch" tool, traders believe there is an 87.2% probability of the Fed cutting rates by 25 basis points next week, and a 29.3% probability of cumulative 50 basis points cuts by the end of 2026, bringing the federal funds rate to 3.00%-3.25%. The majority of respondents expect the Fed to once again state next week that "the downside risks to the employment market have increased in recent months," a statement that will be consistent with the Fed's statement in October. Scope Ratings economist Dennis Shen said, "The doves within the Fed seem to have a slight edge. If the Fed does indeed cut rates again (next week), we expect Fed Chair Powell to emphasize a pause in action thereafter and await further economic signals." There is a serious divergence among Fed policymakers on the issue of balancing risks to price stability and full employment. Some regional Fed presidents are concerned about ongoing inflation due to price increases from tariffs filtering through to consumers. Other regional Fed presidents believe there is still room for further rate cuts to support the labor market. Recent economic data released since the Fed's last policy meeting has not provided clear guidance to policymakers. While several large companies, including Verizon and Amazon.com, Inc., have announced massive layoffs in recent months, weekly initial jobless claims remain at relatively low levels. Meanwhile, the U.S. Bureau of Labor Statistics has warned that it will take some time to resume regular economic data releases after the record-long U.S. federal government shutdown. The highly anticipated U.S. November nonfarm payroll report, originally scheduled for release on Friday, has been postponed due to the shutdown and is now scheduled for December 16. This survey of 41 economists was conducted from November 28 to December 3. The majority of respondents indicated that significant weakness in the labor market remains the main challenge for policymakers. Only 18% of respondents believe that higher inflation is a greater risk. The Fed will also release its latest economic forecasts next week. The median forecast of respondents indicates that they expect the Fed to slightly increase their forecast for economic growth for this year, while lowering their inflation estimates. Forecasts for the unemployment rate in 2026 may also be slightly raised. Fed internal divisions severe, dissenting votes expected After more than 100 basis points of cumulative rate cuts in this easing cycle, Fed policymakers are now contemplating where to stop the rate cuts and finding that their differences are greater than ever before. Over the past year or so, Fed policymakers' forecasts for where rates will ultimately land have shown the largest divergence since at least 2012 (when the Fed began publishing such estimates). Coupled with divergent views expressed by policymakers in public speeches about the outlook for rate cuts, the rare public split has exacerbated the debate over whether the Fed should cut rates again next week and how to proceed thereafter. Powell has acknowledged that there is a "strong divergence" within the Federal Open Market Committee (FOMC) on which of the two targets to prioritize - price stability and full employment. The core issue is whether the economy needs more stimulus to support the labor market or whether policymakers should slow the pace of rate cuts because inflation is above target and tariffs could further push up inflation. The survey of economists also reflects this division. The majority of respondents expect that with increasing internal divergence within the FOMC, there will be another split vote at next week's meeting. Kansas Fed President Esther George, who voted against a rate cut in October, is expected to vote against a rate cut again at the upcoming meeting. Over a third of respondents also believe that St. Louis Fed President James Bullard may vote against a rate cut, as he has recently expressed concerns about inflation. Meanwhile, Trump-appointed Fed Governor Christopher Waller is expected to vote against a 25 basis point rate cut again and advocate for a 50 basis point cut. He dissented at the September and October policy meetings. Under Powell's leadership, the Fed has consistently made monetary policy decisions through consensus in recent years. However, as Trump continues to exert his influence on the Fed, the central bank is becoming increasingly divided. The survey shows that almost all respondents believe that the FOMC is moving towards a decision-making process based on majority rule. However, there is split opinion among respondents on whether dissenting votes will occur at most Fed policy meetings in 2026. Most economists believe that when Powell's term as Fed chair ends in May next year, the Trump administration will choose Kevin Hassett, the current Director of the National Economic Council, to succeed him in this important role. Trump announced earlier this week that he plans to announce his nominee for Fed chair in early 2026 and has already identified the final candidate. In recent days, he has praised Hassett several times and hinted at the possibility of nominating him. However, if selected from the list of candidates for Fed chair previously revealed by the U.S. Treasury Department, most economists believe Fed Governor Lael Brainard would be the best choice. Thomas Simmons, Senior Economist at investment bank Jefferies Financial Group Inc., said, "Brainard has institutional knowledge and experience as a Fed governor. He may also have better working relationships with other FOMC members. However, we have no reason to believe Hassett is a bad choice." It should be noted that Gregory Peters, co-chief investment officer of the fixed income department at global insurance and asset management giant PGIM, recently stated that even if Hassett is approved as the next Fed chair, he may not be able to achieve the rapid rate-cutting pace desired by Trump. It is widely speculated that if Hassett is appointed Fed chair, he may significantly lower interest rates to please Trump. However, Peters pointed out that since the Fed's interest rate decisions are ultimately made by the committee, Hassett cannot achieve this goal on his own. He said, "Does Hassett have enough credibility within the committee to push for consensus? We dont know the answer. I dont think he has that credibility, which is also the signal the bond market is sending us."