Fed Officials Split Over Bigger Risk for Economy Going Into 2026

Federal Reserve officials delivered sharply different messages on interest rates Friday, underscoring a policy debate that is likely to intensify as the US central bank heads into the new year. Notably, the divide includes two policymakers who are set to become voting members of the Federal Open Market Committee in 2026, highlighting how unsettled the outlook remains.

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Three of the officials who spoke focused primarily on the risks posed by inflation, although one stressed that his position reflected support for a temporary pause in rate cuts rather than a complete halt. A fourth official took a different tack, arguing that the greater danger lies in a weakening labor market. Together, the comments illustrated how policymakers are weighing competing economic signals at a delicate moment for monetary policy.

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These remarks marked the first public commentary since the Fed lowered its benchmark interest rate by 25 basis points on Wednesday, the third straight reduction aimed at responding to a rise in unemployment. The decision was not unanimous, signaling growing disagreement within the committee as inflation pressures persist. Updated projections released alongside the move showed that the median Fed official now anticipates just one additional rate cut in 2026.

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Two of Friday’s speakers Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeff Schmid released formal statements explaining why they voted against the latest rate cut. For Goolsbee, it was his first dissent since joining the central bank in 2023. Schmid, by contrast, had also opposed the prior rate reduction in October, reinforcing his more cautious stance.

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Goolsbee said he believed it would have been wiser to wait for additional data before easing policy again, particularly after a government shutdown delayed the release of several key economic reports in October and November. He also pointed to inflation readings ahead of the shutdown that he described as “concerning,” arguing that policymakers lacked a complete picture when they made their decision.

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Later in the day, Goolsbee clarified in an interview with CNBC that his broader outlook remains more dovish than many of his peers. He said he expects more rate cuts in 2026 than the median forecast suggests. “I’m one of the most optimistic people when it comes to how much rates can come down next year,” he said.

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Schmid struck a much firmer tone in his statement. He emphasized that inflation is still running above acceptable levels, economic momentum remains solid, and the labor market, while cooling, is largely in balance. As a result, he argued that monetary policy is only modestly restrictive, if restrictive at all, and does not yet warrant additional easing.

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Both the Chicago and Kansas City Fed presidents will rotate off the FOMC’s voting roster in 2026. Their eventual replacements also weighed in on Friday, offering contrasting perspectives that mirror the broader debate inside the Fed.

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Cleveland Fed President Beth Hammack, speaking at an event in Cincinnati, said she believes interest rates should remain high enough to continue exerting downward pressure on inflation. She described current policy as roughly neutral and suggested she would prefer a slightly tighter stance to ensure inflation continues to cool.

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Fed projections released Wednesday showed that six of the 19 policymakers would have opted to keep rates unchanged through the end of 2025 rather than endorse the most recent cut. Because only 12 officials vote on the FOMC each year and just two of the voting members formally dissented some analysts have described these higher rate projections as “silent dissents,” reflecting unease among nonvoting participants.

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Philadelphia Fed President Anna Paulson, who along with Hammack will gain voting status next year, was the only one of Friday’s speakers to consistently emphasize risks to the labor market. Despite the Fed’s efforts to move policy closer to neutral, Paulson warned that employment conditions could weaken further.

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“Overall, I remain slightly more concerned about labor market softness than about the risk of inflation moving higher,” Paulson said during remarks at an event hosted by the Delaware State Chamber of Commerce. She added that she sees a reasonable chance inflation will continue to ease over the course of next year, which could give policymakers more flexibility to support employment if needed.

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Taken together, Friday’s comments highlight a Federal Reserve still searching for consensus. With inflation not fully tamed and the labor market showing mixed signals, the path for interest rates in 2026 remains highly uncertain and the debate among policymakers is far from settled.

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