The Federal Reserve's two-day December meeting began this morning, and while markets are pricing in an 87-89% probability of a quarter-point rate cut, this could be the most contentious gathering of Fed policymakers in years.

The decision, expected Wednesday at 2:00 p.m. ET, would lower the federal funds rate from its current 4.50%-4.75% range to 4.25%-4.50%—marking the third consecutive rate reduction of 2025.

A Committee at Odds

What makes this meeting unusual isn't the expected outcome—it's the sharp divisions within the 19-member Federal Open Market Committee.

Kansas City Fed President Jeffrey Schmid is expected to dissent for the second consecutive meeting, advocating for holding rates steady. St. Louis Fed President Alberto Musalem may join him in opposition. On the other end of the spectrum, Fed Governor Stephen Miran is likely to dissent for the third straight meeting—but in favor of a larger, half-point reduction.

This three-way split reflects fundamental disagreements about where the economy stands and where it's heading.

Flying Blind on Key Data

Complicating matters further: the Fed is making this decision without complete information. The 43-day government shutdown earlier this year created a backlog in economic data releases. November's hiring figures and the latest inflation readings have been delayed until mid-December—after the Fed has already announced its decision.

This puts Chair Jerome Powell in an uncomfortable position. The Fed prefers to be "data-dependent," but some of the most critical data simply isn't available.

The Case for Cutting

Those favoring a rate cut point to several factors:

  • Labor market cooling: 2025 has seen 1.17 million layoffs—the highest since the pandemic year. While not catastrophic, hiring has slowed meaningfully.
  • Inflation progress: The core PCE price index showed a 2.8% annual rate in September, below the 2.9% consensus estimate. The Fed's 2% target feels within reach.
  • Financial conditions: With markets near record highs and credit flowing freely, the Fed has room to provide insurance against a potential slowdown.

The Case for Holding

Hawks on the committee have their own concerns:

  • Sticky inflation: While improving, inflation has edged higher in recent months. Some worry that cutting too aggressively could reignite price pressures.
  • Tariff uncertainty: The Trump administration's 18% import tariffs are working their way through the economy. Their full impact on prices remains unclear.
  • Market froth: With the S&P 500 up 16% year-to-date and approaching record highs, some argue the economy doesn't need additional stimulus.

The "Hawkish Cut" Scenario

The most likely outcome may be what analysts call a "hawkish cut"—the Fed reduces rates by 25 basis points but signals through its statement and Powell's press conference that further cuts aren't guaranteed.

Futures markets already reflect this expectation. The probability of a January rate cut has fallen below 24%, suggesting traders expect the Fed to pause after this week.

What to Watch Wednesday

Beyond the rate decision itself, pay attention to:

  • The dot plot: Fed officials' projections for future rates will signal how many cuts (if any) to expect in 2026.
  • Powell's press conference (2:30 p.m. ET): His tone and language about future policy will move markets.
  • Dissent count: Multiple dissents would signal deep internal disagreement about the path forward.
  • Economic projections: Updated forecasts for GDP, unemployment, and inflation will shape expectations.

What This Means for Your Portfolio

For investors, the key takeaway isn't the December decision—it's what happens next.

If the Fed signals it's done cutting for now, expect:

  • Bond yields to stabilize or rise slightly
  • Growth stocks to potentially face headwinds
  • Value and dividend stocks to look more attractive
  • Mortgage rates to remain elevated

If the Fed surprises with dovish guidance suggesting more cuts ahead:

  • Tech and growth stocks could rally
  • Bond prices would rise (yields fall)
  • Rate-sensitive sectors like housing and autos would benefit

The Bottom Line

The Fed's December meeting is about more than a single rate cut. It's about setting expectations for 2026 and navigating a deeply divided committee without all the economic data policymakers typically rely on.

For investors, the message is clear: stay diversified, don't overreact to Wednesday's headlines, and remember that monetary policy works with long lags. What the Fed does today will shape the economy for months to come—but predicting that impact with precision is anyone's guess.

The announcement comes Wednesday at 2:00 p.m. ET, with Powell's press conference at 2:30 p.m. Mark your calendar.