The Federal Reserve, facing internal disagreements, convenes today…

According to bets monitored by the CME FedWatch Fed funds futures index, the likelihood of the Fed implementing an additional interest rate reduction tomorrow stands at 90%. However, Wall Street has already factored this into its calculations. The S&P 500 experienced a slight decline of 0.35% yesterday but stayed close to its record peak, and futures showed no movement this morning. In reality, market participants have already shifted their focus beyond the decision itself, which they consider a certainty, despite significant disagreement within the Federal Open Markets Committee regarding whether a cut should indeed occur.

Instead, observers will be intently scrutinizing any shifts in phrasing or sentiment within U.S. Federal Reserve Chairman Jerome Powell’s formal declaration following today's gathering and tomorrow's forthcoming interest rate decision, as well as in his comments to reporters during his Q&A session.

Thomas Simons and Michael Bacolas, analysts at Jefferies, will be observing if Powell utters four specific words: “In a good place.” Should he employ that expression, it might suggest he isn't inclined towards another interest rate reduction in January. Conversely, if he not employs that wording, he could be amenable to additional reductions following this month.

TL;DR

Market anticipates a 90% chance of Fed interest rate reduction tomorrow, with focus on Chairman Powell's commentary.
Analysts will watch for Powell's phrase "in a good place" to gauge future rate cut intentions.
FOMC members are divided on policy, with concerns about inflation versus economic decline and job losses.
Deteriorating job market data suggests the Fed may continue interest rate reductions beyond January.

“The most important aspect of the Fed’s communication on Wednesday is going to be whether Powell characterizes policy as ‘in a good place’, as he did for the first several months of 2025 when the Fed was on hold, or if he repeats his description of policy being ‘modestly restrictive’ or ‘somewhat above neutral’. In the case of the latter, the door will remain open to further cuts in early 2026,” they told clients in a note seen by Coins2Day. “We do not expect that he will say policy rates are ‘in a good place’, but that will be the phrase to watch out for.”

The situation, naturally, is that Powell is well-known for letting the figures lead him. Regardless of his pronouncements tomorrow, his determination in January will hinge on the macroeconomic intelligence that arrives between this moment and then.

This isn't solely Powell's choice. He leads an FOMC where opinions are nearly split. Approximately half of its participants are concerned about generating additional cycles of less expensive credit, which could be inflating a stock market bubble. The remaining half perceives an economy on the brink of decline, with increasing joblessness, requiring more accessible funds to avert a downturn.

At the last Fed meeting, “there was a sharp division beneath the surface” of the FOMC, according to Macquarie’s David Doyle and Chinara Azizova. “Eight of 19 participants saw the policy rate in the 3.5 to 3.75% range [below where it is now at 3.75%]. This division is likely to remain apparent in the December update.”

“Given the likelihood for dissents, the growing differences in forward-looking policy projections are likely to be addressed. The chair is likely to emphasize that this is to be expected when the dual mandate is in tension due to rising unemployment and still elevated inflation,” they said.

Unemployment is trending upward, as shown in this chart from Macquarie:

At Goldman Sachs, chief U.S. Economist David Mericle is also looking for signs of dissent. “There will most likely be two hawkish dissents in the statement, and we expect five participants to register soft dissents,” he told clients. “But we are not sure that all of this would add up to meaningful new information for the market.”

Those disagreements will depend on the Federal Reserve members' perspectives regarding the job sector, which appears to be deteriorating daily.

“It is not realistic to expect the FOMC to box itself in too much by signaling a very strong bias toward a pause in January because if the labor market is still actively softening at that point, a cut might be appropriate. In fact, participants will be even more uncertain than usual about what will be appropriate at the next meeting because we are now two employment reports behind schedule,” Mericle told clients.

Goldman estimates that U.S. Job growth is below the “breakeven” rate vs job cuts:

The U.S. Government shutdown led to the cancellation of those employment reports, which will make the Fed rely more than it typically does on informal or less precise private job market figures. The Fed’s “beige book,”, a recurring compilation of remarks from American companies, indicates that businesses are hiring fewer new employees.

“Last week’s Beige Book suggested that labor demand is weakening via less hiring rather than layoffs – a fragile equilibrium in the labor market that will keep the Fed in a risk management mindset,” Oxford Economics analyst Michael Pearce.

According to Bill Adams, chief economist at Comerica Bank in Dallas, data from private employers paints a similarly bleak picture. He informed Coins2Day that ADP, Revelio Labs, and Challenger, Gray, & Christmas, which are three firms that gather private sector employment figures, all observed a decline in payrolls over recent months. “Challenger, Gray, & Christmas reported employers announced plans for 71,000 job cuts in November, up 24% from the same month last year. They cited restructuring, market and economic conditions, and artificial intelligence as key reasons for layoff announcements,” he stated.

Should the job market keep worsening, it's less probable that Powell will declare interest rates are “in a good place”, and more probable that the Fed will implement subsequent reductions in 2026.

Here’s a snapshot of the markets ahead of the opening bell in New York this morning: