The general assumption is that the Federal Reserve will probably go with a 25 basis point drop on Wednesday, even if it is a split decision, following concerns about whether the central bank will lower interest rates for a third time this year.
"This is a difficult decision," said Alan Blinder, a Princeton economics professor and former vice chair of the Fed. However, I do believe that they are more inclined to cut than not. I wouldn't be shocked if this was a "hawkish cut."
In other words, if rates are lowered this week, investors may be warned not to anticipate the Fed to continue lowering rates meeting after meeting.
Given the current disagreements within the committee, Blinder added that he believes there may be dissenters on both sides of the interest rate decision.
Wilmington Trust chief economist Luke Tilley, who also believes the Fed will lower rates on Wednesday, predicted that Fed Chair Jerome Powell will present a rate cut in the same manner as he did at the previous press conference: by highlighting divergent views on additional rate cuts and advising against assuming the central bank will keep cutting.
A few Fed officials have argued ahead of this week's meeting that given worries about inflation, which is still one percentage point above the Fed's 2% target, there is not a compelling reason to lower rates. These include Jeff Schmid, the president of the Kansas City Fed, and Susan Collins, the president of the Boston Fed.
Austan Goolsbee, president of the Chicago Fed, has also voiced concerns about "frontloading" too many rate reduction due to inflation.
Conversely, a few weeks ago, New York Fed president John Williams a member of Fed leadership and vice chair of the Federal Open Market Committee strongly hinted that he might be in favor of a rate cut.
On November 21, Williams stated, "I still see room for a further adjustment in the near term to the target range for the federal funds rate, to move the stance of policy closer to the range of neutral."
According to Loretta Mester, a former president of the Cleveland Federal Reserve, "the vice chair, John Williams, usually doesn't strongly signal that much in a speech unless he has the Fed chair's endorsement." "So, in my opinion, they will proceed with another 25-basis point cut in December."
Although Mester says she believes the Fed is not inherently incorrect to lower interest rates, she would not support it at this time and would prefer to wait until the start of next year to evaluate how the economy is doing before making any necessary adjustments.
"Aside from the fact that it was in the interest rate projections from September, I don't really see a compelling case to cut this time," she stated.
"It's faster, in my opinion, than a sound economic argument." Blinder warned that policymakers run the danger of making it more difficult to reduce inflation if the central bank lowers rates once again this week.
