Road to Rate Cuts Hits "Roadblock": Hawkish Pressure Builds Inside the Fed, 2026 Roadmap Stuck in Limbo

On Friday, Federal Reserve officials presented strongly opposing views on interest rate policy, including two officials who will have voting rights in 2026, and this debate is expected to continue to dominate the U.S. central bank as it enters the new year. Three policymakers focused on the risk of inflation in their remarks, but one of them suggested that he only advocated temporarily suspending rate cuts to confirm that inflation is easing. Two other officials emphasized the risks facing the labor market. These statements were the first since Wednesday. At that time, the Federal Reserve cut the benchmark interest rate by 0.25 percentage points for the third consecutive meeting in response to the rising unemployment rate. The dissenting votes against this decision indicate that the series of rate cuts has become increasingly controversial in the presence of persistent inflation; and forecasts show that officials' median expectation is for only one rate cut in 2026. "Some members of the committee tend to be more cautious. They want to see more data on inflation and more data on the labor market," said Marke Cassaragi, senior economist at Evercore ISI. With the new Fed chairman about to take office and expected to push for rate cuts, "the bargaining over how many rate cuts will be reasonable in 2026 will be a bit of a process." Two officials - Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeff Schmidt - issued statements on Friday outlining their reasons for opposing the rate cut on Wednesday. This was Goolsbee's first dissenting vote since joining the Fed in 2023, while Schmidt had also voted against the rate cut in October's previous cut. The Chicago Fed chief said in a statement that considering "concerning" inflation data before the government shutdown, and delays in the release of key economic reports for October and November due to the shutdown, he "believes it is more prudent to wait for more information before cutting rates again." Goolsbee added later in the morning that he expects the number of rate cuts in 2026 to exceed that of most other officials: "I am one of the most optimistic people about how much rates can fall over the next year." Schmidt's statement was more explicit. He said in the statement, "Inflation remains too high, the economy shows sustained momentum, and although the labor market is cooling, it is generally balanced," "I believe our current monetary policy stance is at best slightly restrictive." Voting rights rotation The Chicago and Kansas City Fed presidents will rotate out of the voting committee of the Fed in 2026. Their successors also made speeches on Friday - one emphasized concerns about inflation, while the other warned of risks in the labor market. Cleveland Fed President Beth Hamack said at an event in Cincinnati that the central bank should maintain sufficiently high interest rates to continue to put downward pressure on inflation. "Currently, our policy is roughly at a neutral level," she said. "I tend to take a slightly more restrictive stance." In the forecasts released alongside the rate decision on Wednesday, 6 of the 19 policymakers said they had hoped to keep the benchmark rate at its pre-cut level when the cuts end in 2025. As only 12 officials have voting rights on the Federal Open Market Committee that sets interest rates, and only two of the 12 officials with voting rights this week voted against (advocating for higher rates), some analysts called the significant rate forecasts a "silent dissent." Philadelphia Fed President Anna Paulson was one of the officials speaking on Friday, along with Hamack, who will rotate into the voting seats of the FOMC next year. She emphasized the continued risks in the labor market, despite the central bank's recent efforts to adjust rates to a more neutral level. "Overall, I remain more concerned about the softness in the labor market compared to the risk of rising inflation," Paulson said at an event hosted by the Delaware Chamber of Commerce on Friday. "Part of this is because I believe inflation is likely to decrease next year." Meanwhile, San Francisco Fed President Mary Daly posted that she supported this week's rate cut, stating that a stronger labor market would help Americans compensate for lost purchasing power through wage growth. "The Federal Open Market Committee must continue to fight inflation. Any target above 2% is unacceptable. But how to achieve the target is important," Daly said. She does not have policy voting rights this year and next. "Keeping policy too tight could harm American families and bring them two problems: inflation above the target and a weak labor market."