Tonight, a Fed rate cut is almost certain, and this meeting feels more like a "political stress test"!

Written by: White55, Mars Finance

Inside the Federal Reserve’s meeting room, division and uncertainty are woven into a complex web of decision-making, with the highly controversial rate cut decision at its center.

This week’s Federal Reserve policy meeting is set to be one of the most contentious decisions in recent years.

Against the backdrop of a 43-day U.S. government shutdown that resulted in the loss of key economic data, this meeting has gone beyond the realm of mere monetary policy, evolving into a stress test of the Fed’s independence and decision-making mechanisms.

Market expectations for a rate cut have soared from 30% three weeks ago to 97% now. This dramatic shift reflects not only collective anxiety in a data vacuum, but also reveals that political pressure on monetary policy is becoming increasingly visible.

Data Fog and Internal Division

The Fed faces an unusually unique decision-making environment this meeting—a record 43-day government shutdown has resulted in the absence of most key economic data. The Fed, which has always emphasized “data dependence,” is now seemingly navigating in a fog, lacking clear coordinates for decision-making.

The absence of critical official economic data, combined with the mixed nature of alternative indicators, has left the macroeconomic outlook without a clear, objective anchor, leading to significant differences in interpretation. Internal divisions have become public and increasingly polarized.

Currently, the attitudes of Federal Reserve Board members and the New York Fed President toward rate cuts are delicately deadlocked at 4 to 4. This division is directly reflected in the dot plot, which shows a rare “bimodal distribution”—seven officials support keeping rates unchanged for the year, while eight expect a 50 basis point rate cut.

What’s more notable is that both sides have solid reasons. Dovish officials argue the job market has clearly deteriorated, with the August unemployment rate rising to 4.3% (a four-year high) and nonfarm payrolls increasing by just 22,000—far below expectations. Hawkish officials, meanwhile, are focused on inflation, as the core PCE price index is up 2.7% year-over-year, still above the Fed’s long-term 2% target.

The Pathway of Political Pressure

The uniqueness of this meeting stems not only from the absence of economic data, but also from the unprecedentedly direct way political pressure has intervened in monetary policy.

The Trump administration has directly influenced the Fed’s decision-making structure through personnel appointments, breaking the central bank’s long-standing tradition of “political neutrality.”

The appointment of new governor Stephen Milan is particularly symbolic. As both a Fed governor and chairman of the White House Council of Economic Advisers, Milan cast a dissenting vote just one day after taking office, advocating for a more aggressive 50 basis point rate cut.

This policy stance closely aligns with Trump’s public demand for “immediate and larger rate cuts,” raising deep concerns about the Fed’s independence. Even more worrisome, the Trump administration has indicated a possible nomination for a new Fed chair by the end of December.

For current key Fed policymakers, this meeting may be their last chance to publicly take sides. Policy decisions made during such a power transition inevitably involve personal career considerations.

The Fed now faces not only the technical decision of adjusting interest rates, but also a severe test of its institutional independence. The balance between political pressure and professional judgment has become a key variable affecting the outcome of this meeting.

The Dilemma of Risk Management

Confronted by both missing data and political pressure, the Fed’s decision this time is essentially a complex exercise in risk management, requiring a balance among conflicting objectives.

On one hand, the Fed must address downside risks from a weakening job market. In August, nonfarm payrolls increased by only 22,000, a sharp drop from July’s revised 79,000, with the unemployment rate rising to a four-year high of 4.3%. If this slowdown continues, it could trigger a vicious cycle of contracting consumption and economic recession.

On the other hand, inflation risks persist. While current price pressures are mainly driven by supply-side factors (such as increased import costs due to tariff policies) rather than demand-side overheating, there remains uncertainty over whether inflation expectations can be effectively anchored. If the rate cut is too large, it could heighten inflation risks, or even trigger a wage-price spiral.

More complex still, annual U.S. government interest payments have reached $1.1 trillion. While rate cuts could ease fiscal pressure, they might also fuel asset bubbles. These multiple, conflicting objectives are making the Fed’s decision-making framework more complex, going beyond the traditional “dual mandate.”

Institutional Resilience and Communication Challenges

This meeting tests not only the Fed’s decision-making acumen, but also its institutional resilience and communication skills. With internal positions deeply divided, forming a consensus and effectively communicating policy signals are key challenges for Chair Powell.

The dot plot’s divergence is striking. Among 19 policymakers, six believe no further rate cuts are needed, nine support two more cuts this year, and another (likely Milan) is a clear outlier, wanting a 125 basis point cut. This dispersion in forecasts increases market doubts about the Fed’s communication strategy.

The Fed may respond to this challenge by reinforcing forward guidance. One possible approach is to emphasize a “meeting-by-meeting” decision-making principle, avoiding firm commitments to future paths while stressing policy flexibility. This may temporarily sidestep internal divisions, but could weaken the effectiveness of policy signals.

A deeper challenge is how to earn market trust when making decisions amid missing data. The Fed may rely more on high-frequency data (such as weekly jobless claims) and alternative indicators (like business surveys and the Beige Book) as decision references. This shift in decision-making itself is a test of its communication capabilities.

As 2025’s end approaches, the Fed’s future path remains uncertain. The scattered predictions on the dot plot indicate officials’ differing views on the economic outlook and policy path for 2026. This meeting may usher in an entirely new monetary policy framework: data gaps will become the norm rather than the exception; political pressure will move from behind the scenes to center stage; and the Fed’s independence will depend on its ability to maintain policy resolve amid complexity.