The Federal Reserve's Meeting Starts Today—Here's What You Need to Know

The Federal Reserve is expected to cut interest rates Wednesday, but analysts are focused on its view of the economy’s prospects as the government shutdown clouds the outlook.

When the Fed last met in mid-September, the federal government was open, the job market was showing some cracks and inflation was moving up slightly but within reason. 

The overall picture hasn’t changed too much, analysts say, despite noting the shutdown is dampening growth as it stretches into its 28th day. A lack of government data is also making the economy trickier to read, so investors will be watching for the Fed’s sense of where conditions stand.

The group is scheduled to release a statement with their decisions at the close of their meeting on Wednesday at 2 p.m. Eastern Time. Federal Reserve Chair Jerome Powell will then provide more details and answer questions at a press conference at 2:30 p.m.

However, the central bank may not be too willing to share whether it plans to follow up Wednesday’s rate cut with several more reductions. 

“We expect limited signals about the policy path ahead,” wrote Matthew Luzzetti, chief U.S. economist at Deutsche Bank, adding that Fed Chair Jerome Powell is “likely to keep options open and not pre-commit to a particular action through year-end.”

The Fed’s expected cut would lower the federal funds rate by 25 basis points to a target range of 3.75% to 4%, a back-to-back reduction after September’s action. Markets expect several more cuts, though Fed officials haven’t signaled an aggressive path ahead.

If the Fed has been non-committal, it’s partly because Fed officials are divided. Inflation is higher than the Fed might like, prompting some policymakers to support a more cautious stance toward rate cuts.

The economy is also encountering a “conundrum,” with strong consumer spending boosting growth yet the job market faltering somewhat, Bank of America economist Aditya Bhave wrote in a note to clients. Or at least it was back in August, when the most recent official jobs report was released—the shutdown has meant the September report hasn’t arrived.

The cracks in August had prompted Fed officials to cut rates last month. The fog that the shutdown has put on economic data likely means the Fed’s message “can’t change meaningfully,” Bhave wrote.

“Don’t change course when flying blind,” Bhave wrote. 

Will There Be a Few Dissents? 

It’s very likely that one Fed official will want to cut rates more aggressively: Fed Governor Stephen Miran. He was previously a top White House economist and has aligned with President Donald Trump’s position that aggressive cuts are necessary.

Miran, in his first meeting, voted against September’s 25 basis point rate cut, arguing it should have been double that amount. He’s signaled he will do so again.

“My view is that it should be 50,” Miran told Fox Business this month.

At least one other Fed official may vote against the decision—but arguing that the Fed should keep rates flat instead.

There are “meaningful risks of at least one hawkish dissent,” wrote Bhave, of Bank of America.

One such dissenter could be Kansas City Fed President Jeffrey Schmid, who recently noted inflation “remains too high.” Chicago Fed President Austan Goolsbee is another candidate, Bhave wrote, noting he’s recently put himself in the “cautious” camp.

“Let’s be a little wary about frontloading all the rate cuts before we know that inflation’s going to go back down to 2%,” Goolsbee told the Financial Times.

St. Louis Fed President Alberto Musalem, meanwhile, has said he’s “open-minded.” Fed Governor Michael Barr has also called for a “cautious approach,” though Bank of America says he may ultimately vote with the majority since Fed governors don’t tend to dissent from rate decisions.

What Happens After October?

That debate is a sign from Fed officials that “rate cuts past October are not guaranteed,” Wells Fargo economist Sarah House wrote in a research note.

So is a speech this month from Fed Governor Christopher Waller, who had been out in front arguing for cutting rates months ago. Waller, whom Trump has considered for the Fed chair position, recently said he supports another 25 basis point cut in this week’s meeting. 

“But beyond that point, I will be looking for how the solid GDP data reconcile with the softening labor market,” he said. 

Markets seem to expect more Fed cuts ahead. Investors see an over 87% probability that the Fed will cut rates once more in December, according to the CME Group’s FedWatch tool, which uses prices from futures markets to determine probabilities for Fed policy.

While Friday’s inflation report gave a “green light” for the Fed to cut this week, market expectations “appear too aggressive for 2026,” Michael Pearce, deputy chief U.S. economist at Oxford Economics, wrote in a note to clients.

“As the downside risks to the economy fade, inflation risks will loom more heavily in their thinking next year, which we think will justify a more moderate pace of cuts,” he wrote.

Others see more risk that a weak job market will outweigh inflationary concerns. 

There is a “clear chance that the ‘low hire, low fire’ economy becomes a ‘no hire, let’s fire’ story,” ING economist James Knightley wrote in a research note, referring to the current thinking that employers aren’t opting for layoffs but aren’t hiring either.

Will QT Come to a Close? 

Some analysts expect the Fed to halt a program that’s slowly been draining excess money from the financial system. Others say the Fed could hold off until December.

It wouldn’t be a signal of the Fed’s view on the economy, Powell said this month. But it would spell the end of the Fed’s efforts to unwind the extraordinary support it offered to bond markets during the COVID pandemic.

Powell “cleared the path” for ending its quantitative tightening program with his speech, wrote Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.

Bond markets nearly crumbled in March 2020, forcing the Fed to buy up a large amount of Treasury securities and mortgage-backed securities to help prevent a full-blown meltdown. The bond-buying program paved the way for ultra-low interest rates during the pandemic, fueling a spree of home purchases and refinancing. 

It meant, however, that the Fed’s balance sheet ballooned from just about $4 trillion in early 2020 to nearly $9 trillion by 2022.

The Fed has since been gradually unwinding that support by letting some of the bonds it has purchased mature without replacing them, essentially removing money from the system. The Fed’s assets are now below $6.6 trillion, though Powell suggested recently the economy’s growth means assets won’t return to pre-pandemic levels.

The trigger for ending QT is recent market movements in very short-term lending. The plumbing in the financial system is far from clogged, but it’s flowing a little less freely than it used to since the Fed has removed cash from the system. Some signs are starting to suggest “liquidity conditions are gradually tightening,” Powell said last month.

The Fed aims to ensure banks have “ample reserves,” thus preventing spikes in short-term interest rates that would emerge if banks need cash imminently. That is more or less what happened for a brief period in September 2019, when the Fed’s efforts to unwind its post-2008 bond purchases came to an abrupt end. 

To avoid similar strains, the Fed plans to stop its QT program when bank reserves are “somewhat above” the levels it deems “ample,” Powell said.

Analysts say that period is nearing.

“Bank reserves are closer to ample than abundant,” Bank of America’s Bhave wrote, and ending QT “would be a prudent move” even if that may not happen until December.