The U.S. Federal Reserve is expected to cut interest rates on Wednesday as policymakers grapple with a data gap caused by the recent government shutdown and address conflicting views about the risks facing the economy.

The anticipated quarter-percentage-point cut is likely to be accompanied by an uncertain or even aggressive approach to the interest rate path next year, given the division among policymakers between those skeptical about the need for more rate cuts amid persistently high inflation and those who believe the economy and job market could weaken if the U.S. central bank doesn't lower borrowing costs.

New quarterly economic projections, to be released alongside the latest interest rate decision, will show how Fed officials expect the economy to develop in 2026, along with what they consider to be the appropriate interest rate path. However, such year-ahead forecasts often become quickly outdated as data arrives and provide little insight into the expected pace of policy action.

The projections released this week may have a very short shelf life. A few days after the Fed meeting, the US statistical agency will release a slew of data delayed by the 43-day government shutdown, including November's jobs and inflation reports that could help resolve a key debate among central bankers—another reason for the rate-setting Federal Open Market Committee (FOMC) to exercise caution even as it moves to lower its policy rate to a range of 3.50%-3.75%.

"We expect the FOMC to deliver a 25 basis point cut this week with much more aggressive guidance," wrote analysts at TD Securities ahead of this week's two-day policy meeting. "The decision will likely be as or more controversial than October's."

The Fed's last major data on inflation and employment, its two main areas of concern, was for September, when the unemployment rate edged up to 4.4%, and the central bank's preferred inflation measure stood at 2.8% versus its 2% target.

The October 29th decision to cut the policy rate to its current range of 3.75%-4.00% sparked dissent in favor of both tighter and looser monetary policy, a rare move reflecting the persistent inflation risks that several Fed regional bank presidents have cited as their primary concern, and the potential worsening job market that several members of the central bank's Board of Governors have placed at the center of their approach to monetary policy.

Fed Governor Stephen Miran, who is on leave from his role as an economic adviser at the White House, has dissented at each of the two meetings he has attended in favor of a larger half-percentage-point cut, and is likely to do so again. Several Fed regional bank presidents have publicly opposed further cuts, with dissent from one or more of them also expected.

The interest rate decision, projections, and new policy statement will be released at 2:00 p.m. EST (1900 GMT). Fed Chairman Jerome Powell is scheduled to hold a press conference in half an hour. (alg)

Source: Reuters.com