① Nick Timiraos, a renowned journalist often referred to as the "new Fed's mouthpiece," wrote in a recent article on Tuesday that the path to interest rate cuts is becoming increasingly unpredictable due to serious divisions within the Federal Reserve; ② This situation is almost unprecedented in Fed Chairman Powell's nearly eight-year tenure.
Nick Timiraos, a renowned journalist often referred to as the "new Fed mouthpiece," wrote in a new article on Tuesday that the path to interest rate cuts is becoming increasingly unpredictable due to serious divisions within the Federal Reserve, a situation almost unprecedented during Fed Chairman Jerome Powell's nearly eight-year tenure.
Timiraos points out that Federal Reserve officials are currently divided on which threat is greater—persistent inflation or a weak labor market—and even the resumption of official economic data releases may not be able to bridge these differences.
This split is complicating what seemed like a series of rate cuts two months ago, even though investors in the interest rate market currently believe that the Fed is slightly more likely to cut rates at its next meeting than not to.
Timiraos stated that voices of hawks and doves are growing louder within the Federal Reserve, while the centrist stance is becoming increasingly volatile. Doves are concerned about a weak labor market, but they also lack new evidence to support rate cuts; hawks, on the other hand, are using this opportunity to advocate for a pause in rate cuts—they believe consumer spending is stable and are worried that businesses are preparing to pass on tariff-related costs to consumers.
What are the prospects for an interest rate cut in December?
Timiraos points out that it remains uncertain whether Federal Reserve officials will cut interest rates again at their next meeting on December 9-10. New data may put an end to this debate.
Timiraos mentioned two potential paths: some officials believe that the December and January meetings are interchangeable and essentially not very different, which makes it seem somewhat artificial to have to complete another rate cut in December (in other words, there is no need to be fixated on a rate cut next month); another possibility is to combine the December rate cut with guidance that sets a higher threshold for further rate cuts.
This divergence stems from the unusual state of the US economy: rising inflationary pressures coupled with stagnant job growth—a combination known in the industry as stagflation. Many economists attribute this to the Trump administration's significant policy shifts on trade and immigration. "It's easy to predict that we'll experience a mild form of stagflation, but experiencing it firsthand is another matter," said Diane Swonk, chief economist at KPMG.
Timiraos points out that Federal Reserve officials are currently divided on three key issues, which will collectively determine the future direction of policy:
First, will tariff-driven price increases be a one-off phenomenon? Hawks worry that after businesses absorb the initial tariffs, they will pass on more costs to consumers next year, keeping price pressures in place. Doves, on the other hand, believe that businesses' reluctance to pass on further tariff costs so far indicates that weak demand is insufficient to support inflation.
Secondly, the monthly job growth rate plummeted from 168,000 in 2024 to an average of 29,000 per month in the three months to August. Is this due to weak demand for labor from businesses, or a contraction in labor supply caused by reduced immigration? If it is the former, maintaining high interest rates could trigger a recession; if it is the latter, cutting interest rates could overstimulate demand.
Third, are current interest rates still restrictive? Hawks believe that after a cumulative 50 basis point rate cuts this year, interest rates have reached or are close to a neutral level that neither stimulates nor inhibits growth, and further rate cuts pose a risk. Doves, on the other hand, believe that interest rates remain restrictive, and the Federal Reserve still has room to support the labor market without reigniting inflation.
Powell is in a difficult position.
In fact, Federal Reserve officials have been debating these issues for months.
Timiraos noted that Powell's speech at the Jackson Hole Economic Symposium in August attempted to quell the controversy, arguing that the impact of tariffs would eventually subside and that the weakness in the labor market stemmed from insufficient demand—a statement that undoubtedly supported the dovish stance on interest rate cuts. Data released weeks later showed that his strategy had proven correct: new job creation in the United States had stalled.
However, the dovish stance of this Jackson Hole speech was clearly unacceptable to some of his Fed colleagues. By the time of the October 29 meeting, the hawks had become resolute. Kansas City Fed President Schmid voted against the rate cut that month. Regional Fed presidents without voting rights this year—including Cleveland Fed President Hammark and Dallas Fed President Logan—also quickly and publicly expressed their opposition to the rate cut.
At the subsequent press conference, Powell even stated bluntly before the Q&A session began that a December rate cut was not a certainty, “absolutely not”—emphasizing this in a rare, frank tone.
Timiraos stated that Powell's shift is fulfilling his responsibility to ensure that the opinions of all parties within the committee are heard. This approach helps to build consensus when action is needed. Powell had previously encouraged his colleagues to directly convey such signals in the Fed's policy statements, but if the scope of the statements was expanded last month in response to hawkish concerns, it would inevitably alienate dovish members, ultimately requiring Powell to personally deliver the message.
Overall, while many Federal Reserve officials believe it is reasonable for tariffs to cause only a one-off price increase, hawks worry that historical experience from the 1970s or 2021-22 may suggest that this idea is seriously flawed.
September inflation data, released a few days before the Federal Reserve's October decision, was mixed. Overall, the figure fell short of expectations due to a sharp slowdown in housing costs. However, hawks also noted a worrying detail: core inflation, excluding volatile food and energy prices, climbed to an annualized rate of 3.6% over the past three months, up from 2.4% in June. Inflation measures for non-housing services, which should not be directly affected by tariffs, also remained robust.
As Chicago Fed President Goolsby said in an interview last week, "The last thing we saw before the lights went out (government shutdown) was that inflation was heading in the wrong direction."
Doves, however, believe the current situation is vastly different from that of 2021-22 and are concerned about the Federal Reserve's inadequate response to the labor market slowdown. San Francisco Fed President Daly articulated her dovish view in an article on Monday, stating that slowing wage growth indicates the job slowdown stems from declining labor demand rather than insufficient supply. She warned that if the Fed focuses too much on avoiding 1970s-style inflation, it could stifle a potential productivity boom similar to that of the 1990s. She believes the US economy faces the risk of "losing jobs and growth in the process."
Timiraos concluded that even after the data suspension period ends, subsequent US data may not be able to completely resolve the divisions within the Federal Reserve—because these divisions actually depend on the assessment of potential risks: how much attention should be paid to risks that may be far off and only become apparent months later?
(Article source: CLS)
