Don't expect much forward guidance from the central bank on Thursday

On the surface, all seems calm at the Federal Reserve.

Next Thursday, economists expect broad agreement among Fed Chair Jerome Powell and his colleagues on a decision to reduce their benchmark interest rate by a quarter-percentage point to a range of 4.5%-4.75%. This follows the initial half-point cut in September.

The policy statement issued along with the decision is expected to be little changed. Basically, the Fed thinks monetary policy is tight and wants to cut rates gradually.

Read: Fed seen cutting by quarter-point

Yet underneath the surface, there will be intense discussions and disagreements about the road ahead for interest-rates, economists said.

"Behind the scenes, there will be lots to discuss," said Ryan Sweet, chief U.S. economist at Oxford Economics.

At the same time, Lindsey Piegza, chief economist at Stifel Financial, thinks the Fed is more divided than the public realizes.

One group of officials is worried about still elevated inflation and wary of rapid rate cuts, Piegza said. The other group are more worried the labor market might be weakening too much, raising the need for further and potentially significant cuts.

"It's almost as if you have this very clear bifurcated Fed at this point, divided across the dual mandate," Piegza said, in an interview.

The 'dual mandate' is shorthand for two of the goals Congress has given the Fed - one is keeping inflation low and the other is ensuring that the labor market is healthy and vibrant. The two are sometimes at odds. Cutting rates would help the economy and the labor market but might rekindle inflation.

Complicating matters even more, the outlook for the economy is foggy. In some sense, the Fed is in uncharted territory.

"The current situation is just weird - we have never had the Fed tighten 200 basis points above its estimate of [a neutral level of a funds rate] only to see inflation evaporate without a recession," said Dario Perkins, managing director of global macro at TS Lombard in London, in a note to clients.

So there is a lot for the central bankers to discuss at their meeting next Wednesday and Thursday. The Fed will release its policy statement at 2pm ET on Thursday. Powell will start his press conference at 2:30 p.m.

Here is a quick look at some of the big issues swirling around the Fed.

The back-up in 10-year yields

When the Fed cut rates by an aggressive half percentage point in September, the bond market didn't react by easing financial conditions.

Instead, the 10-year yield has jumped 73.9 basis points from its 52-week low of 3.62% reached on Sept. 16.

Piegza said the bond market was signaling the Fed decision to cut by a half-point in September was a "overreaction" and a quarter-point would have been wiser.

Fed officials will get a report from their staff experts about financial market conditions and the 10-year yield.

The Fed officials who are worried about inflation won't mind that the 10-year yield has moved higher because it can tighten financial conditions and dampen price pressures.

But Fed officials concerned about the health of the labor market and the economy won't be so relaxed. They will see the 10-year move as damaging the economy mainly through the housing sector.

"The housing market has been taking it on the chin from higher interest rates. Mortgage brokers were just trying to survive until the Fed cut rates, but long-term rates have moved up when the Fed started lowering rates," said Sweet of Oxford.

Gregory Daco, chief economist at EY-Parthenon, said Fed officials will want to get a better handle on what's driving yields and whether there is a need for monetary policy to respond.

The final destination for rate cuts?

Fed officials want to cut rates gradually but there is no agreement on where to stop or even to pause.

The Fed wants to get its benchmark rate to a "neutral" level that neither spurs or weakens demand.

Fed officials don't agree on what the neutral rate is. They publish their estimates every quarter but the dispersion of estimate from Fed officials runs from a little above 2.0% to almost 4%.

"I think you have a lively debate about where that neutral rate is," Sweet said. He said the issue has been a central topic of Fed officials for months.

"They don't know where the destination is and how quickly they want to get there," Sweet said.

Some Wall Street economists even bristle at the notion of a neutral interest rate, which is always just an estimate.

Publishing a neutral rate "obscures more than it illuminates" because it changes all the time based on economic circumstances, said Lou Crandall, chief economist at Wrightson ICAP.

Election uncertainty

Fed officials may have a sense of who the next U.S. president will likely be when they meet Thursday.

While the the presidential election won't factor into their immediate decision, the next administration's tax, trade, and immigration policies, will play a big role in the economy in coming years.

Import tariffs and other policies may have economic and inflationary impacts, said Michael Gregory, deputy chief economist at BMO Capital Markets, in a note to clients.

"Depending on the economic or inflation impacts, the Fed might need to adjust its policy stance accordingly," he said.

Sweet of Oxford Economics said he doesn't think the economy will be impacted by presidential decisions until late 2025 or early 2026 no matter who wins the White House.

"It is likely to be too early for Powell to comment on the monetary policy implications of the U.S. election," said Andrew Husby, senior economist, U.S., for BNP Paribas.

Some form of forward guidance

Fed officials have said they will be data-dependent in deciding the pace and size of rate cuts.

This has led the market to focus even more intently on recent data. This trend has been going on all year. Some economists estimate that bond-market moves in the U.S. have been twice as large on days of major releases or Fed decisions as on other days. Stock market moves have been two-thirds larger.

The International Monetary Fund recently said that volatility would be reduced if the Fed would clearly communicate that its policy path would not be altered by any individual data point.

Daco agreed, saying he thought the Fed should propose a more forward-looking narrative. "The time for data dependence has passed," Daco said. The Fed should be forecasting the next three, six and 12 months, he said, even though this runs right into election uncertainty.

Perkins of TS Lombard doesn't see an alternative to data dependency.

"The reality is that officials can't tell us precisely what they are going to do -because they are just as confused as the average investor. Like most, they have been whipsawed several times by this weird 'cycle'," he said.

-Greg Robb

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