The Federal Reserve is likely to implement a hawkish rate cut this week, with internal "infighting" about to begin.

After the panic over whether the Federal Reserve would cut rates for the third time this year, the current market consensus is that the Fed will cut rates by 25 basis points this week, even though this may be a divisive decision.

"This is a tough decision," said Princeton University economics professor and former Fed Vice Chairman Alan Blinder. "But I think the likelihood of a rate cut is greater than not... and I wouldn't be surprised if it's a 'hawkish cut.'"

That is to say, this week's rate cut may come with a warning to the market not to expect the Fed to continue cutting rates at subsequent meetings. Blinder said that given the existing divisions within the committee, he believes the rate decision may attract opposition from both sides.

Wilmington Trust Chief Economist Luke Tilley also believes the Fed will cut rates, predicting that Fed Chair Powell will articulate the cut in the same way as at the last press conference: emphasizing differing opinions on further cuts and warning against assuming the Fed will continue to cut rates.

Before this week's meeting, several Fed officials suggested that, given concerns about inflation, the need for a rate cut is not strong, with the inflation rate still one percentage point above the Fed's 2% target. This includes Boston Fed President Collins and Kansas City Fed President Schmid.

Chicago Fed President Goolsbee also expressed hesitation about "front-loading" too many rate cuts, citing inflation. On the other hand, New York Fed President Williams strongly hinted a few weeks ago that he might support a rate cut.

"I think there is still room for further adjustment to the target range for the federal funds rate in the short term to bring the policy stance closer to neutral," Williams said on November 21.

For some Fed watchers, just this statement changed the odds of a rate cut.

"The Vice Chairman usually doesn't send such a strong signal in a speech unless he has the Fed Chair's endorsement," said former Cleveland Fed President Mester. "So my view is that they will proceed with another 25 basis point rate cut in December."

While Mester said she doesn't think a Fed rate cut would necessarily be a mistake, she would not support a cut at this time, preferring to see how the economy performs at the beginning of next year and then adjust if necessary.

"Other than the fact that the September rate forecast included a cut, I really don't see a compelling reason for a cut this time," she said. "I think this is more about acting quickly than based on sound economic reasons."

Blinder warned that if the Fed cuts rates again this week, policymakers may face the risk of making it harder for inflation to fall. "The question is whether we've reached that point now," he said. "I think we probably have."

What do the existing data show?

Due to the government shutdown that lasted throughout October and early November, related data releases were delayed. The Fed's preferred inflation gauge—the Personal Consumption Expenditures (PCE) index—was two months behind.

In September, the core inflation rate excluding food and energy prices rose 2.8%, down 0.1 percentage point from August. Fed officials expect the year-end inflation rate to reach 3.1%.

The September nonfarm payroll report showed that job growth rebounded in September, adding 119,000 jobs, while August saw a decrease of 4,000. This led to a volatile trend: job creation turned negative in June, increased in July, decreased again in August, and rebounded in September.

The latest anecdotal interpretation of the job market in the Fed's Beige Book shows that in the first two weeks of November, layoffs increased slightly, employers were implementing hiring freezes, and adjusting workers' hours. Some companies noted that artificial intelligence replaced entry-level positions or improved the efficiency of existing employees, thereby curbing new hiring.

Fed officials will receive more real-time data releases in the week following the meeting.

Looking ahead to 2026

This week, Fed watchers will focus on the signals officials send about the future policy path and Powell's routine post-meeting press conference. On Thursday, the Fed will also release its latest quarterly rate forecasts, including the outlook for 2026.

"I hope he will talk about how they are actually thinking about the economy," Mester said.

She said she would take a cautious approach to further rate cuts because she believes that what is driving inflation is not just tariffs—which she sees as a one-time price increase—but also service prices.

Although the Fed is trying to cushion the deterioration in the job market, Mester said she believes most of the weakness is due to long-term changes beyond the Fed's control, such as shifts in immigration policy leading to a shrinking labor pool. At the same time, she acknowledged that uncertainty over tariffs, companies wanting to protect profit margins from tariffs, and labor costs have all contributed to the weakness.

"So the labor market is in a near-stagnant state, and I'm not sure a rate cut would really help," she said.

However, Wilmington Trust's Luke Tilley predicts that there will be three more rate cuts at the next three Fed policy meetings, as he believes the job market is weakening and expects it to weaken further.

Luke Tilley estimates that 154,000 government workers accepted buyouts and left in October, which could push the unemployment rate up by nearly 0.1 percentage point in November to 4.5%. He also noted that, according to Bureau of Labor Statistics data, private sector job growth has been negative except for healthcare jobs.

"There are federal employees here, and there are new labor market entrants who are having a hard time finding jobs," Luke Tilley said. "So, all of this together reflects a very weak labor market."

Bank of America Senior U.S. Economist Aditya Bhave expects the Fed to cut rates twice more in June and July next year, not because the economy needs it, but because the Fed will have a new chair. This would put rates in the 3.0% to 3.25% range.

"Our forecast for additional rate cuts next year is due to the leadership change, not our reading of the economy," Aditya Bhave said. "In fact, we think that if rates are cut next week, the Fed will increase the risk of pushing policy into an accommodative stance just as fiscal stimulus is taking effect."

Accenture Global Managing Director Amir Bagherpour predicts that after a rate cut this week, the Fed will cut rates one or two more times next year. This outlook assumes that next year, core PCE inflation will be between 2.5% and 2.7%; GDP will be in the 1.5%-1.8% range; the unemployment rate at the end of next year will be between 4.4% and 4.6%; and average monthly job growth will be between 75,000 and 125,000.