Just how divided is the Fed?
Central bankers were far from achieving a consensus, even as the FOMC cut interest rates for the third time in 2025.
Key takeaways
- The Fed cut interest rates on Wednesday, but three officials cast dissenting votes—one in favor of a larger cut and two in favor of no cut at all.
- Six “soft dissenters” projected no change in the rate for the end of 2025—a possible sign of disagreement within the committee.
- Analysts say divisions are likely to persist into 2026, but they caution that the outlook could change when a new Fed chair is appointed.
The unusual divide at the Federal Reserve is deepening. On Wednesday, three dissenting votes accompanied the Federal Open Market Committee’s decision to cut interest rates for a third time in 2025.
It’s a rare scenario for the central bank’s policy-setting committee, which usually reaches a consensus. Muddying the waters is President Donald Trump’s imminent announcement of Chair Jerome Powell’s successor. Many on Wall Street expect Powell’s replacement to demonstrate a bias toward more cuts. Still, for now, analysts say the Fed is likely to pause as it awaits more economic data.
The disagreements seen at Wednesday’s meeting reflect central bankers’ tight spot as the labor market softens while inflation remains above-target thanks to tariffs.
Three ‘hard’ dissents
Dissenting votes are infrequent at the Fed, but they’ve been especially rare under Powell, who is known on Wall Street for his ability to foster consensus among the FOMC’s voting members.
The central bank’s three cuts in 2025 have all been accompanied by dissents: one at September’s meeting, two in October, and three in December. October and December’s meetings were even more unusual in that the dissenting votes were split in opposite directions between Stephen Miran, who favored an even larger cut each time, and Kansas City Fed President Jeff Schmid, who voted for no cut at all in October and December. Schmid was joined at the December meeting by Chicago Fed President Austan Goolsbee. In contrast, at the three meetings at which the Fed cut rates in 2024, two of the meetings each saw one dissenting vote, while the third was unanimous.
“Collegiality on the FOMC is breaking down,” writes Samuel Tombs, chief US economist at Pantheon Macroeconomics. He says Wednesday’s votes represent the most substantial dissents among the FOMC since September 2019, when the Fed cut rates in what analysts now call a “mid-cycle adjustment” amid acute stress in money markets.
Don Rissmiller, chief economist at Strategas, wrote that it was notable that there weren’t even more dissents coming out of the meeting, “given the range of views and patchwork of government data” the FOMC has had to contend with.
Six ‘soft’ dissents
Accompanying the two votes for a pause were what some analysts termed “soft dissents.” These were visible in the “dot plot” of predictions for interest rates and the economy. Six officials predicted a year-end federal-funds rate for December that was 25 basis points higher than where it now is after Wednesday’s cut. While some of those projections could belong to non-voting members of the committee, analysts say they’re a sign that the FOMC’s tone is changing.
“‘Hard dissents’ from voting members as well as the ‘soft dissents’ seen in the dot plot highlight the Fed’s hawkish bloc,” wrote Kay Haigh, global co-head of fixed income and liquidity solutions at Goldman Sachs Asset Management.
Ultimately, those six dots suggest “the next Fed Chair will have a hard time corralling the Committee’s participants to agree to further reductions in the funds rate next year,” wrote Pantheon’s Tombs.
Why can’t Fed officials agree?
Much of the dispute over rates comes down to macroeconomics. Interest rates are the central bank’s main lever to fight both sticky inflation and a slowing labor market, but changing rates can only address one of those issues at a time. High inflation calls for higher rates to slow the economy, but a cooling jobs market calls for lower rates to stimulate growth.
Powell described it this way on Wednesday: “The situation is that our two goals are a bit in tension. Interestingly, everyone around the table at the FOMC agrees that inflation is too high … and that the labor market has softened.” He explained that the differences in opinion among committee members stem from how they weigh those opposing risks. “You’ve got one tool, it can’t do two things at once … it’s a very challenging situation.”
Powell keeps it civil
In his remarks to the press, Powell said the deepening divisions made sense, given the muddy economic picture. He downplayed any suggestion of unhealthy disagreement within the FOMC, describing the committee’s conversations as thoughtful and respectful. Powell added that he could make a case for either side of the easing/pausing debate. “The discussions we’ve had are as good as any I’ve had in my 14 years at the Fed,” he asserted.
Divisions to persist in 2026
“While the outcome of today’s meeting was expected, the path of rates into 2026 remains much less clear,” says Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth. “The balancing act of containing inflation vs. supporting employment and economic stability does not appear to be subsiding just because the calendar is rolling over.”
Complicating the picture is an incoming change in leadership. Powell’s term as chair will end in May, and President Donald Trump will likely announce his replacement in the coming weeks. Wall Street generally expects Trump, who has repeatedly pushed for lower rates, to name a successor with a bias toward more easing.
For that reason, Jeff Schulze, head of economic and market strategy at ClearBridge Investments, cautions investors against putting too much stock in Wednesday’s projections. “The outlook from the Powell-led FOMC bears less than usual on future Fed policy decisions, given the imminent change in leadership,” he said.
Fears persist on Wall Street about the erosion of the central bank’s independence, but for now, analysts aren’t sounding the alarm. “The division on the Fed vote is notable, but to the extent various FOMC members feel comfortable expressing their views … we can view this as independent policymaking,” wrote Rissmiller of Strategas. “That’s a good thing, and it should likely continue in 2026 as new FOMC voters rotate in and a new Fed Chair gets set to take over.”
