Maxco Futures — The U.S. central bank (Federal Reserve/The Fed) is once again at the center of global attention ahead of its upcoming policy meeting this month. While markets and most economists expect the Fed to cut interest rates, the decision is clouded by sharp internal disagreements among Fed officials regarding current U.S. economic conditions—particularly inflation and the labor market.
1. Why Is the Market Expecting a Rate Cut?
A majority of economists surveyed by the Chicago Booth Clark Center for the Financial Times—around 85% of respondents—believe the Fed will cut its benchmark rate by 25 basis points, bringing the Fed Funds Rate to 3.50%–3.75%.
Reasons include:
- The U.S. labor market is weakening, shown by slowing job growth and rising unemployment claims.
- Economic growth is losing momentum, prompting the need for stimulus to avoid a deeper slowdown.
- Inflation remains elevated but has clearly moderated from its 2022–2023 peaks.
With this backdrop, many analysts view a rate cut as a precautionary step to reduce recession risk.
2. Sharp Internal Division Within the Fed: Two Major Camps
Despite market confidence, the situation inside the Fed is much more complex. Officials are split into two strong factions:
Hawkish Camp — Opposing a Rate Cut
This group argues that:
- Inflation, especially in the services sector, remains too high.
- Loosening policy prematurely could reignite inflation and undermine price stability efforts.
- Labor market data is weakening but not yet severe enough to justify stimulus.
Dovish Camp — Supporting a Rate Cut
This camp believes that:
- Economic slowdown and labor market softening pose more immediate risks.
- Delaying a rate cut could trigger a sharp pullback in consumption and investment.
- The risk of recession outweighs the risk of renewed inflation.
As expected, economists anticipate significant dissent in this meeting:
- 60% expect two dissenters,
- 33% expect three or more.
In short, the decision is unlikely to be unanimous.
3. What’s Behind the Internal Tension?
Two key indicators are fueling the debate:
a. Inflation
- U.S. inflation has come down, but core inflation and services inflation remain above the 2% target.
- Some officials fear a rate cut could revive price pressures.
b. Labor Market
- Recent data shows notable weakening, including declining job openings and slower wage growth.
- For the dovish camp, this signals the economy needs a “buffer.”
These indicators paint a “two-sided” U.S. economy: inflation still warm, but the labor market cooling. The Fed must decide which risk is more urgent.
4. Implications for Global Markets and Emerging Economies
The Fed’s decisions have broad ripple effects globally. If the Fed does cut rates, the following outcomes are likely:
a. U.S. Dollar Weakening
Lower rates reduce dollar demand and support other global assets.
b. Increased Capital Flows to Emerging Markets
Investors may seek higher returns in countries like Indonesia:
- Potential strengthening of the rupiah
- Rising government bond prices due to foreign inflows
- Positive sentiment for the IHSG stock index
c. Support for Commodity Prices
Gold, oil, and other commodities typically strengthen when the dollar weakens.
d. Risks If the Fed Shows Strong Disagreement
If dissent is high or the Fed’s statement sounds hawkish:
- Markets may interpret it as uncertainty about the economic outlook
- Volatility could rise
- Market valuations may face short-term pressure
5. What Should Investors and Traders Watch?
a. Powell’s Press Conference
The chairman’s tone often has more market impact than the rate decision itself.
b. 2026 Dot Plot Projections
This will reveal the Fed’s policy path for the coming years.
c. Initial Moves in the Dollar and U.S. Treasury Yields
These typically set the tone for global markets, including Indonesia’s rupiah movement.
Ade Yunus, ST WPA
Global Market Strategies