Analysis of the "Federal Reserve's Mouthpiece": Why has the Federal Reserve's rate cut suddenly been halted?

Source: Jin10 Data

“Federal Reserve mouthpiece” Nick Timiraos’s latest article points out that during Fed Chair Powell’s nearly eight-year tenure, an almost unprecedented internal disagreement is emerging within the central bank, casting a shadow over the future path of rate cuts.

There are cracks among officials, with debates centering on whether persistent inflation or a weak labor market poses a greater threat. Even with the official economic data resuming publication, these disagreements may remain unresolved.

Although investors generally believe that the Fed is still likely to cut rates at the next meeting, this internal division has complicated plans that seemed feasible less than two months ago.

Hawk vs. Dove Debate

When policymakers agreed to a 25 basis point rate cut in September, 10 out of 19 officials (a narrow majority) expected further cuts in October and December. This pace of three consecutive rate cuts would mirror Powell’s rate cut pace in 2019 and last year.

However, a group of hawkish officials question the necessity of further rate cuts. After the October rate cut brought rates down to the current 3.75% to 4% range, their resistance hardened. Based on public comments and recent interviews, the debate over how to act in December is particularly intense, with hawks strongly opposing the previous assumption of a third rate cut.

Timiraos emphasizes that, in fact, Powell’s blunt rebuttal of market expectations for another rate cut at his press conference was a key reason—to manage a divided committee that seems unable to reconcile its differences.

The government shutdown has exacerbated this divide, as it led to the suspension of employment and inflation reports that could help reconcile such disagreements. This data vacuum allows officials to cite private surveys or rumors that support their earlier assessments.

This dynamic reflects growing voices on both sides, while centrist beliefs waver.

Doves worry about a weakening labor market but lack new evidence to strongly justify continued rate cuts. Hawks seize the opportunity to advocate for pausing rate cuts. They point to stable consumer spending and express concern that companies are preparing to pass on tariff-related price increases to consumers.

Whether officials will cut rates again at the December 9-10 meeting remains uncertain. New data could settle this debate. Some officials believe that December and January meetings can be roughly interchangeable, making the year’s final deadline somewhat artificial. Another possibility is that a rate cut in December could be accompanied by guidance setting higher thresholds for future cuts.

Timiraos states that this disagreement stems from the current unusual economic conditions: inflation faces upward pressure, while job growth stalls—sometimes called “stagflation.” Many economists attribute this to comprehensive policy shifts by the Trump administration on trade and immigration. Diane Swonk, Chief Economist at KPMG, says, “Predicting a mild stagflation is easier, but experiencing it firsthand is another matter.”

The last official data before the government shutdown showed a key inflation indicator at 2.9% in August, well above the Fed’s 2% target and higher than the 2.6% in spring this year, but below the forecasts following earlier tariff hikes by President Trump.

Three Key Issues

Timiraos emphasizes that officials currently disagree on three critical issues, each of which will influence future policy paths.

First, will tariff-driven price increases be one-off? Hawks worry that after absorbing the initial tariff costs, companies will pass more costs onto consumers next year, sustaining inflationary pressures. Doves believe that so far, companies have been reluctant to pass on tariff costs excessively, indicating demand is too weak to sustain inflation.

Second, is the slowdown in monthly job gains—from 168,000 in 2024 to an average of just 29,000 over the past three months through August—due to weak demand for workers or reduced immigration leading to labor supply shortages? If it’s the former, maintaining high rates risks recession. If it’s the latter, rate cuts could over-stimulate demand.

Third, are interest rates still in a restrictive range? Hawks believe that after a 50 basis point cut this year, rates are at or near a neutral level that neither stimulates nor restrains growth, making further cuts risky. Doves argue that rates are still restrictive, leaving room for the Fed to support the labor market without reigniting inflation.

“People just have different risk tolerances,” Powell said after the October meeting. “So that leads to different viewpoints.”

Powell’s Balancing Act

Officials have debated these issues for months. Powell attempted to quell the debate at the Jackson Hole symposium in August, arguing that tariffs’ effects would be temporary and that softening labor markets reflected weak demand, aligning with dovish rate cut supporters. Data released weeks later proved his strategy correct: job growth nearly stalled.

However, his stance was more aggressive than some colleagues could accept. By the October 29 meeting, hawks had hardened their positions. Kansas City Fed President Esther George voted against the rate cut. Regional Fed presidents without voting rights, including Cleveland’s Loretta Mester and Dallas’s Lorie Logan, quickly publicly opposed rate cuts.

At the post-meeting press conference, Powell was even more direct, stating that a rate cut in December was not a certainty.

He was fulfilling his duty to ensure that different voices within the committee are heard. This “committee management” helps build consensus when action is needed.

Timiraos also notes Powell’s “policy history.” In the past, Powell has encouraged colleagues to leak hints in policy statements released after meetings. According to a minutes release earlier this year, he said at a July 2019 Fed meeting: “Press conferences are the worst time to change policy expectations.”

He added that he faced similar concerns then: hawkish factions resisting rate cuts, and officials worried about investors becoming too certain about the next move. Powell and his colleagues carefully crafted language to signal caution.

But last month, to reflect hawkish concerns, expanding the statement’s scope would alienate doves, forcing Powell to deliver the message himself. He said, “More and more people are thinking that maybe we should wait at least one more meeting and see.”

The shift in tone is exemplified by Chicago Fed President Goolsbee. In September, he was one of two officials expecting only one rate cut this year, placing him between doves expecting two cuts and hawks wanting to halt cuts altogether.

While it is reasonable to think tariffs will only cause one-time price increases, hawks worry that experiences in the 1970s or 2021-22 suggest otherwise. Goolsbee said in a recent interview, “Sustained three-year ‘temporary’ price increases are not considered temporary.”

Disagreements Persist

Inflation data released in early October before the decision was mixed. While housing costs slowed sharply, overall data was milder than expected. But hawks noted some worrying details: the core inflation indicator, excluding volatile food and energy prices, accelerated from 2.4% annualized in June to 3.6% over the past three months. A non-housing services metric, not directly affected by tariffs, also remained strong. Goolsbee said, “Before we see the ‘last light’ go out, inflation is moving in the wrong direction.”

As hawkish views grow stronger, doves have reduced public statements but have not abandoned their positions. Among doves, three officials appointed by Trump stand out, and Trump has explicitly expressed a desire to lower rates.

Before the September meeting, former White House advisor and Fed Governor Milani voted against a rate cut, advocating for a larger 50 basis point cut. The other two, Governor Bostic and Waller, are among the five final candidates to succeed Powell as Fed Chair next year.

Doves believe the current situation bears little resemblance to 2021-22 and worry that the Fed will underreact to a slowdown in the labor market. But data disruptions work against them. While substitute employment data is plentiful, price information is much more scattered. Hawks warn that when the Fed emerges from the data fog early next year, inflation may be running high.

San Francisco Fed President Daly articulated the dovish view in a Monday article, arguing that slowing wage growth indicates a slowdown in employment reflects declining labor demand, not supply shortages. She warned against over-focusing on avoiding 1970s-style inflation at the expense of potential productivity booms seen in the 1990s. She wrote that the economy faces the risk of “losing jobs and growth in the process.”

Timiraos concludes that even when data disruptions end, upcoming data may not easily resolve these disagreements, as they often hinge on judgments about how seriously to take risks that may be distant and only emerge months later.