Fed Expected to Cut Rates Again This Week, Internal Divisions May Widen?

The Federal Reserve is expected to cut interest rates for the second consecutive time this week to support a faltering labor market. However, any attempt to extend the easing cycle beyond October could face renewed opposition from some officials who remain deeply concerned about inflation.

Many industry insiders note that although the dovish faction within the Fed currently holds the upper hand in the debate and is expected to push through another rate cut this month, the hawkish camp among policymakers will likely still worry that the rate cuts are too aggressive.

The latest CPI data released last Friday showed that US core inflation growth in September hit a three-month low. While this reinforces the Fed's plan to cut rates this week, the overall stalled progress in cooling prices is insufficient to justify further rate cuts by the Fed in the future.

For the first eight months of the year, Fed policymakers held rates steady, awaiting to assess the economic impact of tariffs and other policy adjustments. After hiring slowed significantly this summer, officials decided to cut the benchmark interest rate by 25 basis points in September. In the dot plot released that month, they projected two more rate cuts before the end of the year.

Investors in the $29 trillion US Treasury market, capitalizing on expectations for consecutive Fed rate cuts, have also reaped above-average returns this year—potentially marking the best annual performance since 2020. The US bond market extended these gains this month, rising 1.1% on expectations of further future rate cuts.

"It will be very difficult for the market to price out 50 basis points of cuts over the next two meetings," said Vishal Khanduja, head of the fixed income team at Morgan Stanley Investment Management. "It's hard to justify deviating from market expectations."