Finally, it's inevitable: investors prepare for a third cut in Fed rates

Market expectations have varied in recent weeks, but the Fed is expected to cut rates by 25 basis points on Wednesday. However, the FOMC remains divided - and the absence of shutdown-related data doesn't help reconcile views.

Six weeks ago, the Fed delivered a second consecutive 25bp rate cut. Nevertheless, everyone noted Jerome Powell's cautious attitude at his press conference. He then said that a December cut was "not an inevitable conclusion - far from it".

Six weeks of hesitation

Yet, at the end of October, investors largely anticipated another cut in December, also mentioned in the Fed's own projections from September.

While Powell's comments did not provoke immediate reactions, expectations gradually moved in November. In a context of no data due to the shutdown, several Fed officials favored a status quo. These comments, notably from regional Fed presidents, then tilted investors toward a status quo.

Then, with limited employment and inflation data, as well as comments from Powell aides - John Williams of the New York Fed and Mary Daly of the San Francisco Fed - put rate cuts back on track.

Now, everyone expects a 25bp cut on Wednesday. According to CME's FedWatch tool, the probability is 90%. Still, we are not absolutely certain about tomorrow's decision.

The reasoning is that the Fed does not particularly want to surprise markets or create volatility. In other words, if the Fed were moving toward a status quo, its members - who cannot publicly speak in the ten days preceding a meeting - would have signaled as such. And we would have had a Wall Street Journal article to inform us.

A divided committee

If market expectations have been varied over the past weeks, it is because the FOMC - the Fed's Federal Open Market Committee - is divided.

These divisions stem from risks on both sides of the mandate. There is a slowdown in the labor market (weaker job creations, rising unemployment...), but at the same time inflation is still closer to 3% than to 2%, with tariffs not yet fully passed through to consumers.

And to complicate matters, the Fed, which has often relied on data, has been in a tight regime for nearly a quarter. The 43-day shutdown completely disrupted the US statistical apparatus - and very little data has been released since early October.

So one should expect to see more dissents. At the last October meeting, there were two. Jeff Schmidt of the Kansas City Fed voted for a status quo, while Stephen Miran - White House adviser who sits temporarily as a governor - voted for a 50bp rate cut.

This week, Miran and Schmidt should stand by their October positions, while Susan Collins (Boston Fed), Austin Goolsbee (Chicago Fed) and Governor Michael Barr could also vote for a status quo. We would need to go back 1988 to find a Fed meeting with three dissents.

The number of dissents will also measure how much Jerome Powell still has the edge, as his succession is already underway - Donald Trump is expected to appoint his replacement by the next meeting. For the role of Fed chair is still to foster consensus within the FOMC.