The Fed is almost certain to lower interest rates this week, and the market's focus is shifting to finding clues about the Fed's future rate cut path.

Recently, Wall Street Journal reporter Nick Timiraos, known as the 'New Fed Correspondent,' stated that the positions within the Fed on whether to continue rate cuts are not unified. If the economy continues to grow steadily, the reasons for further cuts will become less clear.

Timiraos indicated that recent signals from Fed officials suggest that this week's rate cut could mark the end of the first step in the gradual two-step rate cut plan. In the first step, the threshold for cutting rates was relatively low due to previously high interest rates. Officials started cutting rates in September, initially making a significant cut of 50 basis points, followed by a 25 basis point cut last month; if another cut occurs this week, it will be the third consecutive cut.

Timiraos pointed out that recent Fed communications indicate that during quarterly rate forecasts and comments at Wednesday's press conference, Fed officials and Powell will take a more cautious tone regarding further rate cuts.

Timiraos believes that since Powell faces greater skepticism from colleagues about rate cuts, the easiest route is to cut rates this week and provide guidance, suggesting that the Fed may hold one or more meetings before cutting rates again. Officials predicted in the September meeting that they would cut rates four times next year, but their latest forecasts may show a reduction of one or two cuts in 2025.

Internal questioning at the Fed intensifies.

Over the last year, Fed officials have gradually raised their forecasts for the neutral interest rate, and Timiraos believes they may continue to do so in this week's forecasts. The closer the Fed gets to the estimated neutral rate, if inflation remains firm and the labor market does not weaken, the weaker the reasons for further rate cuts become.

Some officials have begun to signal that they need to see more specific evidence that inflation is improving or that the labor market is deteriorating before continuing to lower borrowing costs.

Beth Hammack, the president of the Cleveland Federal Reserve Bank, stated earlier this month, "We are at or near a point where it makes sense to slow the pace of interest rate cuts." She cited two cases from the 1990s when the Federal Reserve quickly cut rates by a total of 0.75 percentage points and then took a wait-and-see approach.

Timiraos noted that some officials may oppose further rate cuts because they feel the economy does not need lower interest rates and that rates are closer to neutral than most models indicate. Some officials might be concerned that continuing to cut rates in the context of rapidly rising asset prices such as Stocks and Bitcoin could encourage spending and prevent inflation from decreasing further.

Several officials also believe that the logic supporting last month's rate cut may still be effective at least one more time. Dean Maki, chief economist at hedge fund Point72 Asset Management, stated, "The reason for supporting rate cuts is that they still believe they have a long way to go to neutral and... inflation does seem to be in a declining trend."

Timiraos indicated that failing to provide the widely expected rate cut this week could create more confusion regarding what the Federal Reserve is doing and why. Recent developments in inflation and the labor market may not yet be significant enough to change officials' predictions for the next one to two years, which are most relevant when considering setting rates.

Furthermore, even if rates are cut by another 0.25 percentage points, they would still be above most reasonable estimates of neutral, which range approximately from 2.5% to 4%. The Federal Reserve's benchmark federal funds rate is currently about 4.6%. Former Federal Reserve Vice Chairman Donald Kohn noted, "It seems there is still a distance of 50 to 75 basis points."

Trump uncertainty.

Timiraos mentioned that this week's meeting may deepen the debate over two issues that could define the direction of interest rates for the coming year: one is the location of neutral rates mentioned above, and the other is the policy changes of President-elect Donald Trump.

After Trump's election as president, he may reshape the outlook for growth, employment, and inflation through changes in trade, immigration, regulation, and tax policies.

Powell previously stated that the Federal Reserve should not speculate or take risks regarding the impact of these policies. Federal Reserve officials, including Atlanta Federal Reserve Bank President Raphael Bostic and St. Louis Federal Reserve Bank President Alberto Musalem, believe that it is too early to consider 'potential policy changes' now.

However, some former officials stated that the Federal Reserve should incorporate potential changes to immigration and trade into their forecasts, as these policies do not require congressional approval.

Eric Rosengren, who served as president of the Boston Federal Reserve Bank from 2007 to 2021, stated that it is difficult to ignore what will happen on January 20 when making predictions in mid-December.