[Fed Watch] December FOMC splits on rates as a “two Americas” economy clouds the outlook

December FOMC deepens internal Fed rift over whether to cut rates
Judgment grows opaque as polarization runs through the U.S. economy
Corporate bankruptcies mount as income gaps sharpen households’ economic reality

At this month’s Federal Open Market Committee (FOMC) meeting, sharp divisions emerged among policymakers over whether to cut the benchmark interest rate. Despite outwardly solid economic growth, deepening polarization—marked by a wave of corporate failures—has blurred the criteria for monetary policy decisions. This polarization is spilling over to households, widening gaps in perceived economic conditions across income levels.

Internal rifts emerge at December FOMC

According to the minutes of the December Federal Open Market Committee (FOMC) meeting released on the 30th by the U.S. central bank, the Federal Reserve (Fed), participants focused their discussion on whether the greater threat to the U.S. economy was the risk of a slowdown in employment or a resurgence of inflation. Some policymakers argued that a rate cut would serve as a preemptive step to stabilize the labor market, citing the recent deceleration in job growth. Others, however, voiced concern that inflation was showing signs of stalling on its path toward the Fed’s 2% target.

While most participants agreed that additional rate cuts could be appropriate if inflation continued to ease as expected, views diverged sharply over the pace and magnitude of future cuts. Some argued that it would be preferable to hold rates steady for a considerable period following the latest cut, emphasizing the need for caution and more data before taking further action. From October 1 to November 12, a 43-day partial shutdown of the U.S. federal government delayed or canceled the release of key economic indicators, including employment and inflation data, leaving Fed officials with limited information at the December meeting.

There was also outright opposition to the rate cut. According to Reuters, six participants, including nonvoting attendees, clearly opposed the move, with two casting dissenting votes in the actual decision. The FOMC is composed of 19 members—seven members of the Board of Governors and 12 regional Federal Reserve Bank presidents

Strong GDP growth, corporate sector in collapse

Markets point to economic “polarization” as the key reason behind the growing divide within the Federal Reserve. On the surface, the U.S. economy continues to show clear signs of strength. According to the U.S. Commerce Department’s release on the 23rd, third-quarter GDP (advance estimate) grew at an annualized rate of 4.3% from the previous quarter. This marked the fastest pace in two years and far exceeded market expectations of 3.2%.

Consumption, the core engine of U.S. economic growth, drove the expansion. Spending on services such as healthcare and travel, along with outlays for recreational vehicles, all increased. Personal consumption expenditures rose at an annualized rate of 3.5%, a notable acceleration from 2.5% in the previous quarter. Private domestic final purchases, a measure of underlying demand from households and businesses, climbed 3%, the highest level in a year. Despite distortions to GDP from trade and inventory swings linked to President Trump’s tariff policies, the data underscored the underlying resilience of the U.S. economy. The surge in private investment fueled by the artificial intelligence boom is also seen as having made a meaningful contribution to growth. Barclays estimated that AI-related investment boosted GDP by 0.8 percentage points on an annualized basis in the first half of the year.

The problem is that corporate distress has not eased despite the strong growth backdrop. The Washington Post reported on the 27th, citing S&P Global Market Intelligence, that at least 717 companies in the U.S. had filed for bankruptcy through November this year. This represents an increase of about 14% from a year earlier and marks the highest level since 2010, in the aftermath of the global financial crisis. Companies pointed to rising prices, high interest rates, supply chain disruptions, and the Trump administration’s tariff policies as key drivers of financial strain. The increase in bankruptcies was especially pronounced in manufacturing, construction, and transportation.

widening divide in perceived economic conditions

This polarization is extending beyond industry into everyday livelihoods. Perceptions of the economy are now diverging sharply along income lines. According to an analysis by Moody’s Analytics, a subsidiary of global credit rating agency Moody’s, households earning at least $250,000 a year now account for roughly half of total U.S. consumption. While high-income households benefiting from rising asset prices continue to spend freely, lower-income households facing mounting living costs are keeping spending levels steady but shifting payment methods toward buy now, pay later plans and installment payments to minimize immediate financial strain.

Pressure on lower-income households is expected to intensify as the labor market cools. The Wall Street Journal reported that 66% of executives surveyed at a Yale School of Management CEO event this month said they plan to reduce headcount or keep staffing unchanged next year. Declining labor demand tied to AI investment and broader economic uncertainty is translating into weaker hiring. If hiring freezes take hold while inflation and interest burdens remain elevated, lower-income workers are likely to face growing difficulty not only finding jobs but also securing wage gains through job changes, further eroding their financial flexibility. The result is a deepening divide in which consumption by high-income households props up the economy while economic conditions felt by lower-income groups deteriorate.

Policy factors add another layer of uncertainty. President Trump’s tariff policies continue to weigh on prices and corporate costs. Research from the Federal Reserve Bank of St. Louis shows that as of August 2025, only about 35% of tariff-related cost shocks had been passed on to consumers, meaning exporters have absorbed much of the burden to protect market share. While potential tariff rebates are estimated to total roughly $120 billion to $150 billion, the White House is widely expected to maintain tariffs through other legal mechanisms, making the policy path difficult to predict. In addition, rapid changes to tax rules under the second Trump administration are exerting a significant impact on household take-home income and corporate investment decisions.