New Survey of Former Federal Reserve Insiders Shows Doubt about Looming Interest Rate Decision

Federal Reserve officials are widely expected to reduce the central bank’s target short-term interest rate at their Dec. 9-10 policy meeting, though a new survey of former Fed officials and staff points to doubt about whether an interest rate cut is the right decision. Many of the former officials surveyed said the U.S. central bank should keep interest rates steady for now, according to the survey conducted Dec. 1-5. 

Among the 32 former Federal Reserve governors, regional Fed bank presidents and staff who responded to the quarterly survey, 15 people said it would be appropriate for the Fed to keep interest rates steady at the December meeting, 12 people supported a rate cut and one said an interest rate increase would be best. Four didn’t offer a view.

The Fed targets a very short interest rate, the federal funds rate, which is currently set just below 4%. The central bank is expected to bring the rate below 3.75% at this week’s meeting. Looking out to 2026 and 2027, the group of former officials generally said it would be best for the Fed to keep rates about a quarter percentage point higher than Fed officials are expected to project this week. 

The survey of former Fed officials and staff is conducted four times per year by Jon Hilsenrath, a former Wall Street Journal economics writer and Visiting Scholar at Duke, in partnership with the Duke University Department of Economics, just ahead of the Fed’s quarterly update of its own economic and interest projections. Former officials are granted anonymity to encourage participation. 

The Fed’s so-called “Summary of Economic Projections” provides its estimates of inflation, unemployment, and economic output, in addition to estimates of interest rates that officials expect to be appropriate over a three-year horizon. The interest rate estimates, also known as the Fed’s “dot plot,” are closely watched on Wall Street for insight into how the central bank’s thinking and plans. 

Fed officials have expressed a wide range of views in recent weeks about what they would like to do about rates. Fed Chairman Jerome Powell said last month that the decision at the December meeting would be a close call.

Several officials have expressed reservations about cutting interest rates, noting that inflation remains high and that the government shutdown made it hard to assess the economy’s performance because of delays in producing officials reports. However, markets in recent weeks have become convinced that the central bank will proceed with a rate cut, in part because the job market has weakened, which the Fed often addresses with lower rates to boost economic demand.

The former Fed officials surveyed this month said the central bank faces a conundrum. The group revised up its projections for both inflation and unemployment in 2026. The problem is that higher inflation typically calls for a higher interest rate — to restrain borrowing, spending and investment — while higher unemployment calls for just the opposite, a lower interest rate to boost spending and investment. Thus, there is a split about how to proceed, which could show up in dissent at the central bank meeting this week. 

The Fed also faces internal disagreement about the effects of central bank policies already in place. Some people believe that the Fed’s target interest rate, still just under 4%, is restrictive, meaning scarce credit is holding back economic growth. Powell and others have expressed a desire to get the rate to a lower view that they deem more “neutral.” A large number of former officials said that the interest rate is already at a neutral level, and perhaps even so low that it is spurring more borrowing inflation than desired. In central bank parlance, this is called “accommodative.” 

The level of restriction or accommodation is important because it informs how much lower rates may go. Eighteen former officials said Fed policy is modestly restrictive, meaning rates can go lower without spurring more inflation, while fourteen people expressed doubt, saying rates were already at a neutral level or perhaps too low to stop inflation from remaining at high levels. 

Their comments on this issue included the following:

• “The fact that the labor market seems to have been gradually cooling is consistent with the stance of policy being modestly restrictive.”
• “The large fiscal deficit keeps US neutral higher than in other advanced economies.”
• “Once they cut next week, I think they will be slightly accommodative. With a funds rate around 3.625 and inflation running near 3 over the next quarter or two, the real funds rate is below 1.”
• “A further cut in rates this round (moving rates close to neutral) is warranted by risks to labor market. But further easing into modestly accommodative territory could be a step too far in light of likely fiscal stimulus coming in the year ahead.”

Participants had a wide range of views about risks to the economic outlook in 2026 and beyond. The biggest concern was inflation. Ten respondents cited the risk that it could run higher than desired over the next three years. The Fed has a 2% inflation target. Respondents uniformly saw inflation running above that objective through 2028. Related to that, several people saw a risk that political interference could lead the Fed to keep interest rates too low over the next few years, worsening inflation. 

President Trump has said he wants a Fed leader who will achieve much lower interest rates. The trade-off with low rates is that it spurs economic demand, which might result in higher consumer prices. “Inflation could move up to 3.5 percent with near zero economic growth,” one person warned. “In that case, the [Fed] would leave the target [interest rate] unchanged until there was progress on inflation.”

Several people also pointed to the investment boom in artificial intelligence as a wildcard. On the one hand, it could power economic growth and rising stock prices. On the other hand, the productivity gains that come with advanced technology could slow business hiring. And then there’s a risk of a related stock bubble building that bursts and damages the economy. 

“AI could lead to a repeat of the late-90s economy, with high productivity growth that puts downward pressure on inflation,” one person noted. 

But another countered: “I worry about equity valuations and the potential for a sudden return to reality. In that scenario, equity values could decline sharply, accompanied by a widening in [credit] risk spreads and general pull back from risk-taking. That change in financial conditions, and the associated uncertainty, could feed back to increased restraints on household and business spending and a further weakening in hiring, or increase in layoffs.”

“The U.S. central bank has entered a highly discordant period that is unlikely to go away anytime soon,” Hilsenrath said. “The economic choices are hard and the political pressure on the central bank is exceptional high. It is the kind of environment that in the past has led to policy errors.”

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