Tip of the needle against Maiman: The Federal Reserve recorded a record of internal division in 2025, and 2026 may be even more exciting

The Zhitong Finance App learned that in the past year, the Federal Reserve fell into a situation of conflict rare since the period of stagnation in the 70s of the last century while achieving the dual goals authorized by Congress — maximizing employment and price stability. This situation has triggered deep internal differences that have not been seen in the Federal Reserve for many years. The most direct reflection is the members' tit-for-tat opposition to interest rate policy.

This trend of disagreement is expected to continue until 2026.

Matthew Luzzetti, chief American economist at Deutsche Bank, pointed out that Federal Reserve Chairman Powell successfully bridged the divided internal central bank consensus this year and pushed for three interest rate cuts. However, if the inflation rate continues to be high and the job market remains weak in the future, the new chairman may find it more difficult to forge consensus.

Luzzetti said, “Although the most likely policy path in the future is to cut interest rates further, we also need to be wary of a risk scenario: the next chairman may eventually face a committee considering raising interest rates.”

Ian Wyatt, chief economist at Huntington Bank, added: “In such an environment, it is certainly a difficult task for the new chairman to reconcile opinions and promote policy consensus. In particular, when the policy positions of the new chairman are seriously out of touch with the views of the majority of members of the committee, the difficulty will increase further.”

Trump's growing influence

At the beginning of 2025, the Trump administration introduced a series of intensive economic policy adjustments, from frequently changing tariff rates to tightening border controls to limit the inflow of immigrants. These measures left the Federal Reserve in a state of policy wait-and-see for most of the year. Officials need to spend a great deal of effort evaluating the potential impact of these policies on economic growth, levels of inflation, and the job market.

Trump is quite unhappy with the Federal Reserve's standstill attitude. On the one hand, he continued to pressure the Federal Reserve to cut interest rates, and on the other hand, he also attacked Powell by seizing the details of the procedure and trying to remove him. Powell's move to dismiss him due to policy differences raised concerns about damage to the central bank's independence, causing severe shocks in the financial market. Although Trump did not fire Powell in the end, he dismissed Federal Reserve Governor Lisa Cook on suspicion of mortgage fraud — the case is still under judicial review, and the US Supreme Court will hear it early next year.

Meanwhile, Federal Reserve Governor Adriana Kugler stepped down this summer. Trump immediately appointed Stephen Milan, chairman of the White House Economic Advisory Committee, to fill the remaining five months of his term. It is worth noting that Milan did not resign from the White House; it only went through temporary separation procedures. This move has many Fed observers worried that it will damage the independence of the Federal Reserve — and Milan himself warned of such risks before joining the government.

Tariff shock and job market weakness

At first, most Federal Reserve officials believed that the impact of tariffs was only a one-time increase in prices and would not evolve into long-term inflationary pressure. However, with the arrival of “Liberation Day” on April 2, the Trump administration introduced the strongest and broadest coverage tariff policy in a century, and more and more Federal Reserve officials are beginning to worry that tariffs may cause ongoing inflation problems.

To this end, the Federal Reserve spent the entire summer closely monitoring and evaluating the actual impact of tariff policies.

By July, the US labor market had shown signs of cooling. The Federal Reserve held a monetary policy meeting and decided to keep interest rates unchanged — this is its consistent policy position throughout the year. However, the decision was opposed by Federal Reserve Governor Christopher Waller and Michelle Bauman, who both advocated cutting interest rates as a precautionary measure to cushion the weak job market. This opposition clearly revealed the deep divisions within the Federal Reserve: members have very different judgments about the degree of stickiness of inflation and the extent to which policy formulation should focus on weak employment.

In late summer, job market data revealed more serious problems than expected. This change prompted Powell to lay the groundwork for September's interest rate cut operation in August. This interest rate cut was the beginning of three interest rate cuts in the fall, in line with the policy rhythm of 2024.

In the fall of the same year, America also experienced the longest government shutdown in history. Due to the lack of officially released economic data, the Federal Reserve fell into a “blind flight” dilemma when making key interest rate decisions. Officials have to rely on private sector data, but while such data has sufficient coverage in the job market, it has very limited reference value in the fields of inflation and prices.

By December, the rift within the Federal Reserve had been completely made public. Although the Federal Reserve finally cut interest rates for the third time in the year in the same month, two voting members — Chicago Federal Reserve Chairman Austin Goulsby and Kansas City Federal Reserve Chairman Jeff Schmid, clearly expressed their opposition. Both advocated keeping interest rates unchanged due to concerns about inflation. At the same time, Governor Milan also voted against it, but he is inclined to take measures to cut interest rates more drastically, that is, cut interest rates by 50 basis points in one go. In addition, six other non-voting members also indicated that they were not in favor of cutting interest rates that month.

Despite much discussion in the market about the risk of inflation caused by tariffs, the actual impact of tariffs on inflation this year was lower than expected. Some Federal Reserve officials, including Powell and Waller, believe that inflationary pressure caused by tariffs will peak in the first quarter of next year, and then gradually decline. However, members such as Cleveland Federal Reserve Chairman Beth Hammark and Dallas Federal Reserve Chairman Lori Logan held different opinions — both were voting members of the 2026 Federal Reserve. They are concerned that the stickiness of inflation may exceed expectations, and that the state of high inflation may continue for a longer period of time.

2026: Cautious approach to policy formulation

In the context of completing three so-called “preventive interest rate cuts” and the level of inflation has not yet fallen back to the target range, the Federal Open Market Committee has clearly sent a signal that it will set aside sufficient time to observe and evaluate the economic situation before considering further interest rate cuts.

Although the latest economic data has been released one after another, the current economic picture is still vague due to distorted statistics due to the government shutdown. The inability to accurately grasp the current state of economic fundamentals has further increased the difficulty of predicting the Federal Reserve's policies and making precise measures.

The latest inflation report for November shows that as rent prices fall back and are included in statistical calculations, the overall price increase has narrowed significantly. However, given the data gap caused by the government shutdown, many market participants are skeptical about the accuracy of this report.

New York Federal Reserve Chairman John Williams said that he believes that the latest inflation data based on the Consumer Price Index (CPI) underestimates the actual inflation level by 0.1 percentage points; Hamak believes that the underestimation may reach 0.2 to 0.3 percentage points. Meanwhile, the US unemployment rate has climbed slightly to 4.6%.

Looking ahead to 2026, Fed officials expect to cut interest rates only once more next year. Although the job market continues to cool down, officials believe that this weakness has not reached the point where an urgent response is needed. Meanwhile, the inflation rate is still above the policy target of 2%. Officials expect US economic growth to pick up in 2026, driven by both the fiscal stimulus brought about by the tax bill and the economic rebound effect after the government shutdown ended.

Jeffrey Roach, chief economist at LPL Financial, said that inflation data is expected to fluctuate in the next few months, but the inflation level for the full year of 2026 will show a downward trend, which will open up room for the Federal Reserve to cut interest rates further.

He pointed out, “At the beginning of 2026, inflation data may rise several times as the scale of tax rebates exceeding expectations pushes back up in consumer demand, but inflation is expected to return to a cooling path in the second half of next year.”

Former Kansas City Federal Reserve Chairman Esther George predicts that the unemployment rate will stabilize next year (albeit at a higher level), while inflation will remain high in the face of large-scale fiscal deficit spending, ongoing doubts about the independence of the Federal Reserve, and a relaxed financial environment.

George said, “Affected by the interruption of official data releases, the FOMC's policy actions in 2026 may be cautious, but the trend of cutting interest rates will continue. The policy logic is that these interest rate cuts aim to push policy interest rates back to a neutral level.”

Furthermore, in 2026, the Federal Reserve will host its first change of chairman in eight years. Outsiders generally expect that the president will nominate someone who favors a low interest rate policy as the new chairman. Even so, if the inflation rate continues to be high, the new chairman still faces quite a few challenges if he wants to push for consensus on interest rate cuts. Cleveland Federal Reserve Chairman Hamak has made it clear — as a 2026 voting member, she advocates keeping interest rates unchanged until next spring.

Wilmer Sith, bond portfolio manager at Wilmington Trust, said that differences within the Federal Reserve are expected to continue in 2026. If the new chairman tries to force interest rate cuts and other members of the committee clearly oppose it, then the probability of opposition at the meeting may rise further.

He also anticipates that the Trump administration will continue to pressure the Federal Reserve to implement a lower interest rate policy.

However, Powell's term as chairman will last until next May. Stith pointed out that due to this factor, the number of interest rate cuts by the Federal Reserve may be very limited in the first half of 2026, and it is expected that it will cut interest rates only once between January and May.

Sith said, “I think once the new chairman takes office, the number of interest rate cuts is expected to reach two to three times throughout the year. The future Federal Reserve may be more closely linked to the government's policy stance for a long time. From this point of view, interest rate cuts are already at the cutting edge.”