FRB Interest Rate Policy Dilemma: Keep It Steady or Ease?

The biggest issue revealed by the December FOMC meeting minutes is the serious divergence of views within the committee regarding the timing and scale of rate cuts. As long as inflation declines gradually, most officials believe further rate cuts are appropriate, but opinions sharply differ on the timing of implementation. This uncertainty has strongly influenced the market to expect a hold in January 2026.

Divergence of Views on the Timing of Rate Cuts

According to the minutes, even among officials who supported a rate cut at this meeting, some noted that the decision was “on a delicate balance,” and that maintaining the current rate was also justifiable. This reflects the significant internal differences within the Federal Reserve.

Meanwhile, some officials explicitly stated, “After this rate cut, it would be appropriate to keep the current range for a while.” These differing perspectives were clearly reflected in the post-meeting forecasts. While the median forecast predicts a 25 basis point rate cut in 2026, individual projections showed a very wide distribution. The market expects at least two rate cuts next year, but officials’ caution suggests this could be less.

Inflation and Employment Dilemma

More notably, there is a fundamental disagreement among policymakers about whether inflation or unemployment poses a greater threat to the US economy. Many participants pointed out that shifting to a more neutral policy stance could effectively prevent a serious deterioration in the labor market, reflecting a focus on employment.

At the same time, several members warned of the risk that inflation could become entrenched, and expressed concern that continued rate cuts under such conditions might be misinterpreted as a weakening commitment to the 2% inflation target. This axis of disagreement indicates more than just technical policy debate; it reveals fundamental differences in economic outlooks.

Conflicting Data Complicates Policy Decisions

Economic data released after the meeting has further complicated, rather than resolved, this split. The November unemployment rate rose to 4.6%, the highest since 2021. Meanwhile, the consumer price index rose less than expected. These indicators bolster the case for rate cuts.

However, the real GDP growth rate in Q3 reached 4.3% annualized, the highest in two years, demonstrating economic resilience. This strong data is likely to reignite inflation concerns among those who opposed a rate cut in December. Because the statistics point in conflicting directions, it is extremely difficult for officials to reach a consensus.

Uncertainty Remains Over 2026 Rate Cut Outlook

Due to the government shutdown from mid-October to mid-November, policymakers did not have access to sufficient economic data. This information gap is widely recognized as making policy decisions even more difficult.

As a result, the Fed has maintained a hold stance but remains extremely cautious about the next move. The scenario for interest rate adjustments throughout 2026 will heavily depend on the quality and quantity of new data, and market uncertainty is expected to persist for some time.