The Fed's Pause Is Not a Pause. It's a Split, and That Matters.

Three dissents at the December FOMC meeting. The most since 2019. Jeffrey Schmid voting to hold rates. Stephen Miran pushing for a 50-basis-point cut. Austan Goolsbee on the opposite side entirely, wanting to pause.

The narrative—the one everyone's repeating on Bloomberg and CNBC—calls this a "hawkish cut" or a "pause signaling." But that's backward. A pause implies consensus around a temporary halt. What the Fed actually showed was radical disagreement about where the economy is and where it needs to go.

The language matters because consensus is how the Fed maintains credibility. When the Fed speaks, the market listens because the institution appears unified around a shared analysis. That facade cracked this week. And it's going to stay cracked because the underlying problem isn't cyclical—it's structural.

The Two Competing Realities

You have one faction looking at job market weakness and saying: rates need to come down. ADP reported 32,000 job losses in November. The unemployment rate edged up to 4.4%. There are lags in data because of the government shutdown, but the trajectory is not ambiguous. This group—the Trump-appointed governors plus some regional Fed presidents—sees employment risk and wants to act.

You have another faction looking at the same labor market and seeing something else: a system that is resilient enough to weather higher rates, paired with inflation that isn't falling the way the Fed predicted. Core PCE is still 2.8%. Goldman Sachs projects 7% S&P 500 EPS growth for 2026 and thinks that marginal inflation from tariffs will prove "one-time" and contained. This camp sees the labor market as strong enough to keep rates where they are. They see inflation as the binding constraint. They worry that another cut now locks the Fed into a cycle of loosening that can't be reversed if Trump's tariff promises materialize into actual policy.

The problem: both groups have a point. The job market is softening, and inflation hasn't come back to 2%. The economy can support 2.3% growth in 2026 and face upside inflation risks from trade policy. These aren't contradictions that get resolved in a vote. They're contradictions that get unresolved in a fractured committee.

Why the Dissents Matter More Than the Rate Decision

When the Fed cuts rates and calls it temporary, it needs to own that judgment. Three dissents mean one-sixth of the voting board wouldn't endorse the central judgment. That's a signal to markets that the institution itself is bifurcated.

More important, Powell has three meetings left. Three. His term ends in May. The next chair—likely Kevin Hassett or someone similar—will walk in with Trump's implicit directive to cut rates more and sooner. That person will inherit a committee that is already split and will immediately face a question: does the new leadership reunify the Fed around a more dovish stance, or does it fracture further?

There's historical precedent here, and it's instructive. When the Fed's internal divisions become visible, markets stop trusting the institution's forward guidance. You see it in the dots—the projections Fed officials pencil in for where they think rates should go. The spread is enormous. Seven officials think rates should end 2026 at or above current levels. Eight think there should be at least two cuts. The range tells you there is no consensus about the economy's path or the Fed's role in managing it.

The last time you saw this kind of fragmentation was 2015-2016. The Fed had raised rates once, in December 2015, and the reaction was violent enough that officials fractured over whether to cut again. It took Janet Yellen's consensus-building skills—and the market panic of February 2016—to reorient the committee. Even then, it took two years for the Fed to rebuild credibility.

Powell is leaving. He spent his tenure trying to thread a needle between inflation hawks and growth doves, and he managed it reasonably well. But the underlying conditions that forced that balance are still there. Inflation is sticky. The labor market is ambiguous. Trade policy is a wildcard. And now there's a leadership vacuum where there used to be an experienced hand managing dissent.

What Gets Priced In

The market already understands this. Ten-year yields ticked up to 4.3% on the back of the Fed's December statement. The takeaway wasn't "rates are stable." It was "the Fed has lost its footing." Expectations for 2026 rate cuts have compressed. Investors are pricing in maybe one cut, maybe none—a far cry from the six cuts that were priced in mid-year.

That repricing is rational. It reflects the underlying reality: a Fed with three dissents doesn't have the standing to promise future policy moves. Every cut becomes a question mark. Every pause becomes a decision, not a stance.

The cable markets are already adjusting. Mortgage rates aren't falling despite the Fed cutting three times. Credit spreads are widening. Corporate issuers face the prospect of a Fed that can't commit to anything beyond the next meeting.

Here's the risk: if the economy slows sharply next year and the Fed needs to cut quickly, it will have to overcome its own internal disunity to do it. A fractured Fed in a crisis is not positioned well. Consensus is the tool the Fed uses to engineer soft landings. Without it, you get stop-start policy, communication failures, and widened spreads across asset classes.

The Succession Problem

Powell said this week he wants to hand over the economy in "really good shape." But he's also leaving a committee that is philosophically divided in a way it hasn't been since he took the chair. The next leader will inherit this, and the mandate to lead it will be muddied by the fact that Trump has already signaled what he wants: lower rates, faster.

That's a situation where consensus becomes nearly impossible. The Fed's legitimacy rests on appearing above politics. A new chair who cuts rates because Trump wants them cut—even if the economics support it—has already ceded that appearance. And a committee that is publicly divided will make it harder to argue that the cuts are economically justified rather than politically orchestrated.

There's a long way between now and that succession. But the three dissents at December's meeting weren't noise. They were a preview of the structural problem the Fed is about to face: a committee without a consensus about the economy's direction, led by an outgoing chair with limited time, preparing to hand power to a successor in uncertain circumstances.

That's not a pause in rate cuts. That's an institution in transition, trying to maintain credibility while its foundation shifts beneath it.