"Fed's Mouthpiece" Analysis: Why Did the Fed's Rate Cut Path Suddenly Become Uncertain?

Original Title: “Analysis of the 'Fed's Mouthpiece': Why Has the Fed's Rate Cut Path Suddenly Become Uncertain?”

Original Author: Jin Ten Data

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Reprint: Mars Finance

Nick Timiraos, the “Fed's mouthpiece,” recently wrote that during Fed Chairman Powell's nearly eight-year tenure, an unprecedented division is emerging within the central bank, casting a shadow over the future path of interest rate cuts.

Officials have developed rifts internally, with the debate focusing on whether persistent inflation or a weak labor market poses a greater threat. Even if official economic data is resumed, it may not bridge these differences.

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

hawk-dove debate

When policymakers agreed to cut interest rates by 25 basis points in September, 10 of the 19 officials (just over half) expected further cuts in October and December. The pace of three consecutive meetings of rate cuts will echo Powell's rate-cutting pace from last year and 2019.

But a group of hawkish officials questioned the necessity of further rate cuts. After officials cut rates again at the end of October, bringing them down to the current range of 3.75% to 4%, their resistance became even stronger. According to public comments and recent interviews, the debate over what to do in December has been particularly intense, with hawks strongly opposing the previous assumptions about a third rate cut.

Timiraos emphasized that, in fact, Powell directly refuted the market expectations for another rate cut at the press conference that day, a key reason being to manage the committee that was fractured by seemingly irreconcilable differences.

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

This dynamic reflects that the voices of the two major camps are growing louder, while the beliefs of the moderates are wavering.

Doves are concerned about a weak labor market, but lack new evidence to support a strong case for continuing interest rate cuts. Hawks seize the opportunity to advocate for a pause in rate cuts. They point out that consumer spending is stable and express concern that businesses are preparing to pass on tariff-related price increases to consumers.

Whether officials will cut interest rates again at the meeting on December 9-10 remains uncertain. New data may put an end to this debate. Some officials believe that the meetings in December and January of next year are largely interchangeable, which makes the year-end deadline seem somewhat contrived. Another possibility is that while cutting rates in December, they may accompany it with guidance that sets a higher threshold for further cuts in the future.

Timiraos stated that this divergence stems from the current unusual economic conditions: inflation is under upward pressure while job growth has stalled, a situation sometimes referred to as “stagflation.” Many economists attribute this to the Trump administration's sweeping policy changes on trade and immigration issues. KPMG's Chief Economist Diane Swonk said, “It's one thing to predict that we will experience mild stagflation, but it's another to go through it firsthand.”

The last official data released before the government shutdown showed that a key inflation indicator in August was 2.9%, which is not only well above the Fed's 2% target but also higher than the 2.6% recorded in the spring of this year, although it is lower than the forecasts produced after President Trump raised tariffs earlier this year.

Three key issues

Timiraos emphasized that officials currently have differences on three key issues, each of which will impact the future policy path.

First, will the price increases driven by tariffs be one-time only? Hawks are concerned that after absorbing the first round of tariffs, companies will pass on more costs next year, thus keeping price pressures persistent. Doves, on the other hand, believe that companies have so far been reluctant to pass on tariff costs, indicating that demand is too weak to support sustained inflation.

Secondly, the decline in the growth of monthly new jobs added—from 168,000 in 2024 to an average of only 29,000 over the three months ending in August—raises the question of whether it is due to weak demand for workers from companies, or a shortage of labor supply caused by decreased immigration. If it is the former, maintaining high interest rates poses a risk of recession. If it is the latter, cutting interest rates could excessively stimulate demand.

Third, are interest rates still in a restrictive range? Hawks believe that after a 50 basis point rate cut this year, interest rates are at or near a neutral level that neither stimulates nor suppresses growth, and therefore the risk of further rate cuts is high. Doves, on the other hand, believe that interest rates remain restrictive, which leaves 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 this leads to people holding different views.”

Powell's Balancing Act

Officials have been debating these issues for months. In a speech in August at Jackson Hole, Wyoming, Powell attempted to quell the debate, arguing that the impact of tariffs would be temporary and that the weakness in the labor market reflected insufficient demand, aligning himself with the dovish side in favor of interest rate cuts. Data released weeks later proved his strategy correct: job growth nearly stagnated.

Nevertheless, the stance of this speech is more aggressive than what some colleagues can accept. By the meeting on October 29, the hawks had firmed up their position. Kansas City Fed President George Schmidt voted against the rate cut for the month. Regional Fed presidents without voting rights, including Cleveland Fed President Loretta Mester and Dallas Fed President Lorie Logan, also quickly expressed their opposition to the rate cut.

At the press conference after the meeting, Powell didn't even wait for reporters to ask questions before he got straight to the point, stating that a rate cut in December was not a done deal.

Powell was then fulfilling his duties, ensuring that the voices of different factions within the committee were heard. This “committee management” helps to build consensus when action is needed.

Timiraos also pointed out Powell's “policy history.” In the past, Powell encouraged colleagues to reveal such clues in the policy statements issued before the post-meeting press conferences. According to the minutes of a meeting released earlier this year, he said at a Federal Reserve meeting in July 2019, “The press conference is the worst time to change policy expectations.”

Timiraos added that at the time, he also faced similar concerns: a hawkish camp resisted interest rate cuts, and officials worried that investors were too certain about the next steps. Powell and his colleagues released cautious signals by carefully considering their wording.

But last month, if the scope of the statement had been expanded to reflect hawkish concerns, it would have alienated the doves, which compelled Powell to personally convey this message. Powell said, “There are now more and more people who feel that maybe we should at least 'wait a minute' on this issue and observe one meeting before deciding.”

The change in Chicago Fed President Goolsbee illustrates this shift in direction. In September, he was one of the two officials expected to cut rates only once this year, placing him between the doves who anticipate two more cuts and the hawks who hope for no further cuts.

While it is reasonable to think that tariffs would only lead to a one-time price increase, hawks are concerned that experiences from the 1970s or 2021-22 suggest that this thinking could be fundamentally mistaken. Goolsbee said in an interview last week: “A 'temporary' price increase lasting three years cannot be considered temporary.”

Difficulties in resolving differences

The inflation data for September, released a few days before the October decision, is mixed. Overall, the numbers are milder than expected due to a sharp slowdown in housing costs. However, hawkish observers noted some troubling details: the core measure, excluding volatile food and energy prices, saw an annualized growth rate accelerate from 2.4% in June to 3.6% over the past three months. A non-housing services indicator, which should not have been directly affected by tariffs, also remained strong. Goolsbee said, “Inflation is moving in the wrong direction before we see the 'last light' go out.”

As hawkish views become increasingly firm, doves are speaking less in public, but they have not abandoned their stance. Among the doves, three officials appointed by Trump are particularly prominent, and Trump has clearly expressed a desire to lower interest rates.

Ahead of the September meeting, former White House advisor and Fed board member Milan immediately cast a dissenting vote, advocating for a larger rate cut of 50 basis points. The other two, board members Bowman and Waller, are among the five final candidates to succeed Powell as the chair of the Fed next year.

Doves believe that the current situation bears almost no resemblance to 2021-22, and are concerned that the Fed may underreact to the slowdown in the labor market. However, data interruptions work against them. While alternative data on employment is abundant, price information is much more scattered. Hawks warn that when the Fed emerges from the data fog early next year, it may find inflation running at elevated levels.

San Francisco Fed President Daly articulated a dovish perspective in an article on Monday, asserting that the slowdown in wage growth indicates that the deceleration in employment reflects a decline in labor demand rather than a supply shortage. She cautioned against becoming overly focused on avoiding 1970s-style inflation, which could stifle potential productivity booms similar to the 1990s. She wrote that the economy faces the risk of “losing jobs and growth in the process.”

Timiraos summarized that even if the data interruptions end, the data to be released may not easily resolve these discrepancies, as these discrepancies often boil down to judgments on how seriously to take risks that may be distant and could emerge months later.