Fed Officials Signal Divided Path Ahead For 2026

Austan Goolsbee, Jeffrey Schmid, Beth Hammack and Anna Paulson. (Bloomberg)

Key Points

• Federal Reserve policymakers expressed differing views on future interest rate paths after a December quarter-point rate cut.
• Two dissenting voters, Austan Goolsbee and Jeff Schmid, opposed the rate cut due to concerns about persistent inflation.
• Other policymakers, like Anna Paulson and Beth Hammack, also showed divergence, indicating a lack of consensus for 2026.

Federal Reserve policymakers aired their differences over the future path of interest rates on Friday, just two days after delivering a quarter-point rate cut at their December meeting, likely the last scheduled adjustment of 2025.

The debate, pitting concerns over persistently high inflation against rising downside risks to the labor market, showed the lack of consensus and open-ended policy outlook facing the central bank in the coming year.

In the wake of Wednesday’s decision to lower rates for a third time in 2025, two dissenting voters defended their opposition to the move. Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeff Schmid expressed concerns that progress on inflation has stalled and price pressures remain high.

Goolsbee, however, noted that his dissent should not be read as opposition to lower rates in 2026. “I am not hawkish on rates for next year,” he said in an interview with CNBC on Friday, adding that he remains among the more optimistic officials about the scope for cuts in 2026.

His objection, he said, was about timing and confidence. Inflation has largely exceeded the Fed’s target for much of the past four years, and recent readings have failed to show sustained improvement, he said. “I felt the more prudent course would have been to wait for more information,” he wrote in his dissent statement.

Schmid warned in his dissent on Friday that easing policy too quickly could undermine the Fed’s credibility. Inflation remains too high, he said, and the economy has continued to show momentum even as the labor market cools. Any loss of confidence in the Fed’s commitment to price stability could push long-term borrowing costs higher, including on government debt, he warned. “I don’t think we can be complacent,” he said.

While Schmid and Goolsbee issued official dissents in favor of an interest rate pause, several nonvoting policymakers signaled in their rate projections discomfort with the pace of easing.

At the same time, officials who didn’t vote this year but will rotate onto the committee at the January meeting began drawing their own lines.

Philadelphia Fed President Anna Paulson said she is more concerned about downside risks to the labor market than about inflation flaring back up, arguing that price pressures are likely to ease next year. “On net, I am still a little more concerned about labor market weakness than about upside risks to inflation,” she said at an event in Delaware on Friday, adding that broader hiring outside a few resilient sectors remains soft.

Cleveland Fed President Beth Hammack said on Friday she would like policy to remain more restrictive, signaling caution about lowering rates further while inflation remains above the Fed’s 2% goal.

Their divergence suggests the voting committee in 2026 is unlikely to be any more unified than the one that delivered this week’s contested cut, and paints a picture of a central bank grappling with the right balance of patience on inflation and insurance against a labor market slowdown. While Chair Jerome Powell signaled this week the Fed has likely done enough for now, many of his colleagues aren’t as sure.

With inflation elevated, hiring cooling unevenly, and political pressures mounting, the Fed’s divisions are becoming harder to contain.

January’s decision will also likely be divisive and could set the tone for the year to come.

Write to Nicole Goodkind at nicole.goodkind@barrons.com.