The Federal Reserve was already deeply divided in its "hawkish battle," and now it faces new challenges.
On November 19, Eastern Time, the Federal Reserve released the minutes of its monetary policy meeting held on October 28-29. Policymakers were clearly divided on whether to cut interest rates again in December. At the time, Fed Chairman Jerome Powell stated in a press conference following the interest rate decision that a December rate cut was not a certainty.
The Federal Reserve's monetary policy was already hesitant, and the lack of key data has cast an even deeper shadow over the future. The U.S. Bureau of Labor Statistics announced that it will not release the October non-farm payroll report and has postponed the release date of the November non-farm payroll report to December 16, later than the Federal Reserve's December interest rate decision.
Traders in the interest rate market are now less optimistic about a December rate cut. The CME FedWatch Tool indicates only about a 30% chance of a rate cut in December. Given the uncertainty surrounding the data, the Fed's better option might be to "pause" rather than "fly blindly."
The meeting minutes contained numerous disagreements.
A number of subtle signals in the latest Federal Reserve meeting minutes warrant close attention.
Zhongtai Securities Yang Chang, chief analyst of the policy team at the research institute, told 21st Century Business Herald that the October FOMC meeting minutes released three major signals. First, a hawkish bias. Although participants almost unanimously agreed that balance sheet reduction should be stopped, regarding interest rates, a growing number of officials were cautious about continuing easing due to concerns about the progress of declining inflation. This shift marginally revealed a hawkish bias.
Second, there is significant internal division within the Federal Reserve. The meeting minutes noted that some participants assessed that further rate cuts might be appropriate, while many participants indicated that maintaining the current interest rate for the remainder of the year would be suitable. Therefore, the number of officials supporting and opposing a December rate cut was practically equal, with neither side holding an overwhelming advantage, signifying substantial internal division within the Fed. This relatively confused signal has exacerbated policy uncertainty in the short term, triggering risk aversion among investors, reflected in the recent amplified volatility of risk assets.
Thirdly, financial market stability. The minutes show that "some participants commented on the problem of overvaluation of financial market assets, and some participants emphasized the risk of disorderly declines in stock prices, especially given the possibility of a sudden reassessment of artificial intelligence in the market." "Given the prospects of AI-related technologies," this means that the stability of financial markets is beginning to come into the Federal Reserve's view.
Currently, the FOMC can be broadly divided into three camps. The dovish camp includes Federal Reserve governors such as Milan, Waller, and Bowman, who favor continuing to cut interest rates to prevent a weakening labor market.
For example, Waller, a leading candidate for Federal Reserve Chair and current Fed Governor, said on November 17 that he supports another interest rate cut at the December policy meeting. He is increasingly concerned about a sharp slowdown in the labor market and hiring activity. Meanwhile, inflation, excluding the effects of tariffs, is "relatively close" to the Fed's 2% target.
Meanwhile, hawkish members such as Kansas City Fed President Schmid, Boston Fed President Collins, and St. Louis Fed President Mussalem worry that further rate cuts could hinder inflation from returning to the 2% target level.
The moderates include Powell, Federal Reserve Vice Chairman Jefferson, and New York Fed President Williams. They advocated for patience. Jefferson stated on November 17 that he believed the downside risks to employment had increased, but the Federal Reserve should be cautious about further rate cuts as interest rates were nearing neutral levels.
Is a December rate cut out of the question?
With Federal Reserve officials losing key employment data to reference ahead of their final meeting of the year, the market is more confident that the Fed will hold rates steady.
Yang Chang told reporters that the November non-farm payroll report will be released later than the Fed's December decision, and coupled with the suspension of the October employment and CPI reports, the Fed's December meeting will lack key employment and inflation data guidance.
Looking at the alternative data that needs attention recently, mainly soft data, the ISM manufacturing and non-manufacturing PMIs in October were 48.7 and 52.4 respectively, the University of Michigan consumer sentiment index in November fell to a record low of 50.3, the 5-year inflation expectation fell to 3.6%, and the ADP employment data as of November 1 had a four-week moving average of -2,500, which generally shows that the US economy is still in a weak state.
However, Yang Chang cautioned that the lack of hard data and differing opinions mean that the December decision may be more cautious, with a higher probability of pausing rate cuts. The CME FedWatch Tool shows that the probability of a December rate cut has fallen to around 30%. However, given that financial stability is also an important indicator, if US stocks experience a sharp decline due to a reversal in the rate cut trade, the Fed's "Fed put option" to reassure the market still exists.
Jerry Chen, a senior analyst at Gain Capital, told reporters that before the Fed's October meeting, there was a relatively unified consensus in the market that a December rate cut would occur. However, three weeks later, concerns about inflation gradually increased, and more and more Fed officials publicly called for caution in cutting rates, which led to a sharp drop in the probability of a December rate cut implied in the current interest rate market.
However, the outcome of the December meeting is not yet set in stone. Jerry Chen cautioned that with the reopening of the US government, a backlog of economic data will be released, and the prospect of a December rate cut may still be uncertain.
Monetary policy remains shrouded in mystery.
The Federal Reserve faces immense pressure in fulfilling its dual mission of stabilizing employment and combating inflation.
The minutes of the meeting showed that Federal Reserve officials generally noted that core inflation, excluding volatile food and energy prices, remained high, with tariffs pushing up goods prices offsetting the impact of falling housing services prices. Some officials expressed concern that persistent core non-housing services inflation could make it difficult for overall inflation to fall back to the 2% target level in the near term.
Regarding the labor market outlook, Federal Reserve officials generally expect labor market conditions to gradually soften in the coming months, with activity declining compared to the beginning of the year. Businesses are reluctant to add or remove employees. Some officials stated that low job turnover and businesses' reluctance to create new positions are adding downside risks to the labor market, and if labor demand weakens further, the unemployment rate could rise sharply.
Divergent forecasts for the future have intensified the "hawk-dove war" within the Federal Reserve. Hawks are more concerned about inflation, and this group has recently expanded, including four regional Fed presidents with voting rights this year, as well as Fed Governor Barr. Doves, on the other hand, are more concerned about the labor market, including three Fed governors appointed by President Trump, who worry that their colleagues will overemphasize continued high inflation. The danger of inflation, which could lead to an unnecessary economic recession, is far from being realized, and high inflation is still a long way off.
Nick Timiraos, a vocal critic of the Federal Reserve, believes that the Fed will face at least three dissenting votes regardless of whether it cuts rates in December. If rates remain unchanged, it will face opposition from three governors appointed by Trump; if the Fed cuts rates by 25 basis points, another group of at least three officials may oppose it, including four regional Fed presidents with voting rights this year, as well as Fed Governor Barr, who have previously expressed greater concern about inflation risks. This means the December meeting will be one of the most contentious policy discussions in recent years.
Looking ahead, Yang Chang told reporters that the Federal Reserve faces a complex situation of "employment risks and inflationary pressures," and monetary policy will inevitably adopt a data-dependent model, adjusting according to the ever-changing economic outlook and risk balance. Therefore, disagreements among officials will continue to exist.
Regarding the US economy, against the backdrop of trade frictions, inflation is currently only rising moderately. Tariffs are now entering a period of stability, and with previous inventory depletion, the first quarter of next year will be a crucial time to confirm whether the inflation was a one-off shock. The job market remains weak, with growth nearing stagnation, but a sharp decline has not yet been observed. Yang Chang cautions that the one-off impact of the US government shutdown has temporarily delayed economic growth, bringing negative and positive effects to the fourth quarter of this year and the first quarter of next year, respectively.
The importance of future employment data may gradually increase. Ed Al-Hussainy, a portfolio manager at Threadneedle Asset Management, stated that given the reduced labor supply due to the US government's tightening immigration policies, the unemployment rate will become a more important indicator of the health of the labor market. "If the unemployment rate remains stable, it will further demonstrate that the Federal Reserve does not need to provide more stimulus to the economy. If the unemployment rate rises, even by only 0.1 percentage point, it will be a strong signal that the economy needs more support."
Looking ahead, Yang Chang told reporters that the Federal Reserve's interest rates still have room to fall compared to the neutral rate, but the pace may be delayed to confirm the inflation situation. Meanwhile, considering the political cycle, Powell's term will last until May 2026, and Trump is likely to nominate a dovish candidate, who may also support a cautious approach followed by further easing of interest rates.
(Article source: 21st Century Business Herald)
