jakiro
Author: Wu Yu, Jin Shi Data
Over the past month, Fed officials have had sharp public disagreements over the likely direction of the economy and the appropriate level of interest rates.These public debates have led to widespread doubt among economists and market participants whether there is enough support within the Fed to cut interest rates again at its upcoming policy meeting on December 10.
However, there has been a dramatic shift in market sentiment over the past few days – investors and economists now generally believe thatThe Federal Reserve is likely to cut interest rates in December.
What is the core driver of this transformation?Economists note that Fed officials are leaning toward another rate cut amid ongoing concerns about the health of the job market.
“The deterioration we’re seeing in the labor market is enough, I think, to warrant a rate cut by the Fed in December,” Wells Fargo chief economist Tom Porcelli said in an interview.
The first official data released after the government shutdown ended showed that the unemployment rate climbed to 4.4% in September, the highest level in nearly four years.At the same time, there are signs that the steady trend of “low hiring, low firing” in the labor market may be at a critical point of deterioration.
Matthew Luzzetti, chief U.S. economist at Deutsche Bank, bluntly stated in a note to clients that the job market remains “in a precarious state.”
A more critical turning point came from the statements of core officials.Josh Hirt, a senior economist at Vanguard, revealed in an interview that his personal judgment that the Fed will cut interest rates is based on the public remarks of New York Fed President Williams last Friday. As a close ally of Fed Chairman Powell, Williams clearly advocated an interest rate cut and said he “still believes there is room for further adjustments to interest rates in the short term.”
This statement directly detonated the financial market, and expectations for a December interest rate cut soared from nearly 40% a day ago to more than 70%.Hurt said bluntly: “I think the market’s interpretation of this is accurate.”
He further added,Williams’ stance means the Fed’s three most influential officials – Powell, Williams and Fed Governor John Waller – support a new round of easing.”We think this is a very powerful camp that will be difficult to shake.”
Ethan Harris, former chief economist at BofA Securities, also pointed out that the economy is showing more convincing signs of weakness, which is forcing the Fed to take action.
“Accurate transmission” of signals from the Federal Reserve’s top leaders
Fed communications—especially at the highest levels—are rarely accidental.
Signals from high-level officials, especially the statements of the chairman, vice-chairman and the highly weighted New York Fed president, have been carefully weighed: they must convey clear policy ideas while avoiding overreaction in financial markets.
This is why current New York Fed President Williams’ speech last Friday was of great significance to the market.By virtue of his position, he is one of the “Big Three” leaders of the Fed, along with Chairman Powell and Vice Chairman Jefferson.
Therefore, when Williams hinted at “the possibility of further interest rate adjustments in the short term,” investors interpreted it as a clear signal from senior leaders: leadership is inclined to cut interest rates at least once more in the near future, and the most likely time point is the December Federal Open Market Committee (FOMC) meeting.
Krishna Guha, head of global policy and central bank strategy at Evercore ISI, analyzed in a client report: “Although the expression ‘in the short term’ is somewhat vague, the most direct interpretation is the next meeting.”
“While Williams may have been expressing a personal opinion,The Fed leads members of the ‘Big Three’Signals on key ongoing policy issues are almost always approved by the chairman; it would be professional misconduct for him to send such a signal without Powell’s signature.” he added.
The core of internal differences: Three major disputes are difficult to reconcile
Despite growing consensus on rate cuts, economists still expectOne or more Fed officials who favor keeping interest rates steady will vote against it at the meeting.
Other officials have not been as vocal in their support of a rate cut as Williams.Boston Fed President Collins and Dallas Fed President Logan both expressed hesitancy to cut interest rates further.Collins was vocal about concerns about inflation in an interview with CNBC; Logan was more hawkish, saying she wasn’t even sure she would have voted for two previous rate cuts.It should be noted that Collins has voting rights on the FOMC this year, while Logan’s voting rights will not take effect in 2026.
Harris said that taking a step back, the Fed is facing an “impossible challenge”: the current economy is showing the characteristics of stagflation – high inflation and high unemployment coexist, and there is no clear Fed policy response to this situation, which has also led to deep differences within the interest rate setting committee.”There are some very fundamental differences.”
The first point of disagreement is whether the current Fed policy is tightening or easing.Officials worried about inflation believe that monetary policy works through capital markets, and the current strong performance of capital markets means that policy may already be loose; officials who support interest rate cuts counter that financial conditions in key sectors such as housing remain at tight levels.
The second point of disagreement revolves around the interpretation of inflation.Officials who favor rate cuts, such as Williams, say that if the temporary impact of tariffs is excluded, inflation would have been lower; however, officials who are concerned about inflation have found that sectors not affected by tariffs have shown signs of rising inflation.
In addition, all Fed officials are puzzled by a paradox: how a weak job market and strong consumer spending can coexist.
“This is going to be an intriguing vote,” Harris said, adding,The final decision is likely to be hammered out at the meeting.
Special Background: Data Vacuum and Considerations of “Insurance Interest Rate Cuts”
Former Cleveland Fed President Mester analyzed that Powell may use the press conference on December 10 to convey a key message: this interest rate cut is an “insurance rate cut”, and then the Fed will wait and see the response of the economy.
It is worth noting that due to the record-long government shutdown, the Federal Reserve will not be able to obtain the government’s latest employment and inflation data at this meeting, which means that decision-making will be carried out in a certain degree of “data vacuum.”
Vanguard’s Hurt also noted,The speeches of those Fed officials who opposed a December rate cut sent an important signal to the market: the Fed was not “cutting rates for the sake of cutting rates,” thereby preventing bond markets from pricing in higher inflation expectations.“This limits the possible negative consequences of a rate cut while inflation is high and the labor market is not clearly in trouble..”
