Fed’s Deepening Split Clouds the Path for 2026 Rate Cuts

Internal fractures at the Federal Reserve are throwing 2026 monetary policy into doubt. The central bank's path forward is getting murkier by the meeting.

The Committee's Cracks Are Showing

Forget a unified front. The Fed's latest minutes reveal a boardroom divided, with hawks and doves pulling policy in opposite directions. One faction eyes persistent inflation metrics, itching to hold the line. The other watches lagging economic indicators, pushing for relief. This isn't just debate—it's a fundamental split over the economic diagnosis.

Why 2026 Just Got Hazy

That division directly obscures the timeline for 2026. Forward guidance, the market's favorite crutch, becomes worthless when the guides can't agree on the map. Projections for rate cuts get fuzzy, trading on hopium instead of data. It's the classic central bank maneuver: talk in circles until the data forces their hand—usually a quarter too late.

Markets Left Reading Tea Leaves

The result? Volatility. Every speech from a Fed governor is now hyper-scrutinized for clues, creating whipsaw action in bonds and equities. Traders aren't pricing in policy; they're betting on committee politics. It's a fragile game of telephone where the original message is already garbled.

The takeaway? Don't trust the dot plot. The Fed's own uncertainty is the only certainty for 2026. In the end, they'll follow the market, not lead it—taking credit for the soft landing they lucked into, as usual.

Key Takeaways

• Fed officials remain sharply divided on the outlook for 2026, with forecasts ranging from no rate cuts to several, highlighting growing policy uncertainty as new economic data arrives.
• The next Fed chair will inherit a committee with a strong hawkish bloc, even as officials project steady growth, easing inflation, and a slower pace of rate cuts after 2025.

The big divisions at the Federal Reserve show no signs of stopping next year, if officials’ brand-new quarterly projections are any guide.

While the Fed is penciling in one cut in 2026, that masks a vast dispersion in the individual forecasts from the central bank’s officials. That projection, after all, is the median view from 19 different policymakers.

Seven Fed officials are leaning against cutting rates in 2026—a minority but a sizable hawkish camp nonetheless. Eight others see at most two cuts next year, while four officials are eyeing more aggressive action.

It’s not clear which camp will prevail as new economic data comes out. That includes some reports that were delayed thanks to the government shutdown.

“All eyes will be on whether that fresh data can help forge a new consensus, or only widen the existing divide,” wrote Cory Stahle, an economist at Indeed.

Why This Matters

Divisions inside the Fed signal growing uncertainty around borrowing costs, shaping expectations for consumers, businesses, and investors.

It’s a division that Fed Chair Jerome Powell’s replacement will have to grapple with next year. Powell’s four-year term as Fed chair is up in May, giving President Donald TRUMP a chance to name his replacement. 

Trump has long wanted sharply lower interest rates—he said Wednesday the rate cut could’ve been “at least doubled.” Whoever he picks to run the Fed is likely to be sympathetic to those arguments, even if they’re not wedded to Trump’s views.

That person, however, will need to work within the confines of a 19-member committee that has a large hawkish contingent. The next Fed chair “will have a hard time corralling the Committee’s participants to agree to further reductions,” wrote Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.

Wednesday’s 25-basis-point rate cut is the Fed’s third this year and brought the federal funds rate to a target range of 3.5% to 3.75%. Rates are down from a recent peak of 5.25% to 5.50% in 2023.

A Sunnier Outlook

Some economists thought the FOMC’s forecasts might show officials penciling in two cuts in 2026, not one. If the outcome seemed a bit hawkish, it may be partly due to Fed officials’ sunnier view of the economy.

The Fed’s median forecasts showed they see real GDP growth of 2.3% in 2026, significantly higher than the 1.8% pace they had forecast in September. It’s also more optimistic considering the somewhat sluggish GDP growth they anticipate for 2025: 1.7%.

Asked about the more optimistic forecasts, Powell pointed to “resilient” consumer spending, investments for data centers and fiscal policy remaining “supportive” in 2026.

“It looks like the baseline WOULD be solid growth next year,” Powell said. 

Officials also don't see major signs of the job market faltering. Fed officials expect the unemployment rate to rise to 4.5% by year-end, up a notch from the 4.4% rate in September. However, they predict the jobless rate will turn back down to 4.4% by the end of 2026. 

Fed officials also see inflation continuing to come down toward the Fed’s 2% goal—and at a slightly faster pace than they forecasted in September. 

Their forecasts suggest the Fed’s preferred inflation gauge may decelerate to 2.5% in 2026, marginally better than their September forecasts of 2.6%. It’s a sign that despite endless tariff headlines, prices aren’t rising at an alarming pace.

The Hawks’ Silent Dissents

One factor that drew attention heading into the FOMC meeting was the possibility of the “silent dissent.”

The dissents among three Fed officials weren’t so silent. Fed Governor Stephen Miran, Trump’s newest Fed appointee, voted against Wednesday’s action and wanted a deeper cut. The two other dissenting votes argued the Fed should’ve kept rates unchanged.

However, there was clearly more disagreement than the vote total suggests. The Fed’s forecasts showed six officials agreed with the hawkish perspective of keeping rates steady, even if they didn’t vote for that view. 

Not all FOMC officials vote at each meeting, since the 12 regional Fed presidents rotate into voting spots each year. Some Fed officials may also decide to vote with the consensus view, even if they disagree with the outcome.

Even so, it’s clear that the “ranks of the hawks are growing,” wrote Preston Caldwell, chief U.S. economist at Morningstar.

Cuts Still Likely

Analysts widely expect the Fed to pause its rate cuts in January—but see the central bank continuing with reductions later in the year.

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The Fed still “maintains an easing bias,” wrote Wells Fargo economist Sarah House, adding that the Fed is likely to cut rates by 25 basis points again in March and June. 

“Our base case remains that the current easing cycle is not over yet but rather that it is entering a slower phase,” House wrote.

The central bank is in a “tricky environment,” she wrote, flagging that key reports such as November’s jobs report were still missing ahead of the Fed meeting. The data the Fed did have “continue to indicate some tension” between the Fed’s two goals of maximum employment and price stability, she added. 

The job market has shown some signs of weakening, helping the case for quicker rate cuts. On the other hand, inflation remains above the Fed’s 2% goal, which argues for a halt in rate cuts.

Powell flagged that tension as a key factor why the Fed appears more divided than in the past, telling reporters, “it’s a very challenging situation.”

“Everyone around the table at the FOMC agrees that inflation is too high and we want it to come down, and agrees that the labor market has softened and that there's further risk,” Powell said.

The difference, he said, is which risk Fed officials place a greater weight to and how incoming data changes those calculations.

“The discussions we have are as good as any we've had in my 14 years at the Fed,” Powell said.