Fed Expected to Cut Rates, But Investors Eye Clues for Future Moves

Markets are entering this week’s Federal Reserve meeting with two clear expectations: policymakers will lower interest rates by 25 basis points, and Chair Jerome Powell will likely keep his forward guidance limited amid widening divisions within the central bank.

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Earlier this month, Powell signaled that the Federal Open Market Committee (FOMC) remained focused on risks to the labor market. That focus intensified after last week’s delayed inflation report came in softer than anticipated, easing pressure from the Fed’s more hawkish members for now.

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“The labor data continues to play a larger role in shaping the policy debate,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI. As long as inflation expectations remain anchored and price pressures from wages and services appear contained, Guha said, Powell can prioritize employment and “guide the Fed back toward a neutral policy stance.”

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The Fed’s policy announcement is scheduled for 2 p.m. Wednesday in Washington, followed by Powell’s press conference half an hour later. The meeting will not include updated economic forecasts or new interest rate projections.

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Futures tied to the federal funds rate suggest that investors see a quarter-point rate cut as a near certainty. But even with consensus on this move, deep divisions persist among officials over the long-term direction of rates. While some policymakers have expressed growing concern about the softening job market, others remain uneasy about persistent inflation pressures.

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Headline consumer prices rose less than expected in September, yet the core measure which strips out volatile food and energy components climbed 3% year-over-year, still a full percentage point above the Fed’s 2% target.

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Several officials have also highlighted stubborn inflation within the services sector, an area less influenced by trade tariffs. At the same time, new threats of tariffs against China and Canada have injected fresh uncertainty into the economic outlook.

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As a result, analysts expect this week’s policy meeting to reveal an even wider divide than September’s, when nine members supported no more than one additional rate cut for the remainder of the year.

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Given that backdrop, Powell is widely expected to tread carefully in his messaging. The absence of key government economic data due to the ongoing shutdown will likely make him even more cautious about signaling future moves.

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“The hope is that eventually the incoming data will help narrow the divide between the two camps,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank Securities Inc. “But for now, Powell is likely to offer very little indication about what’s next in December or beyond.”

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Adding to the potential drama, Fed Governor Stephen Miran, appointed by President Donald Trump, has already indicated he will dissent again, advocating for a larger half-point rate reduction. On the opposite side, Kansas City Fed President Jeff Schmid is viewed as a potential holdout who may prefer to keep rates unchanged.

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Another issue on the radar for Fed watchers is the fate of the central bank’s balance sheet. There’s growing speculation that the FOMC could decide to end the runoff of Treasury securities from its $6.6 trillion portfolio at this meeting. The Fed has been gradually reducing its holdings to normalize monetary conditions without destabilizing short-term funding markets.

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Powell noted earlier this month that the balance sheet could soon reach a level consistent with ample liquidity, but recent signs of stress in money markets may accelerate that decision.

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“Right now, we’re walking a fine line between market volatility and actual financial stress,” said Guneet Dhingra, head of U.S. rates strategy at BNP Paribas. “From a risk management standpoint, it makes sense for the Fed to seriously consider halting the runoff.”

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With rate cuts already priced in and divisions deepening among policymakers, Powell faces the delicate task of reassuring markets without committing too far in either direction. For investors, the takeaway may not be the rate cut itself which is widely expected but the tone Powell strikes on how much further the Fed is willing to go as it navigates the competing pressures of slowing growth and sticky inflation.

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In short, this week’s meeting could mark both a shift in policy and a test of the Fed’s unity, as Powell seeks to balance cautious optimism with the realities of a fractured committee and an uncertain economic landscape.

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