Nick Timiraos, a renowned journalist often referred to as the "new Fed mouthpiece," wrote in a new article on Monday that Fed Chairman Powell's allies have paved the way for him to push the currently divided Federal Open Market Committee (FOMC) to pass an interest rate cut at the next meeting, although this may provoke several dissenting votes.
Timiraos points out that the unusual degree of division within the Federal Reserve means that final decision-making power will be more concentrated in Powell's hands than usual.
Timiraos noted that, in order to resolve this sharp division within the Federal Reserve, Powell may be weighing two options, each with its own drawbacks:
The first option is to cut rates as expected by the market, and then subtly hint at a higher threshold for further rate cuts through a carefully crafted post-meeting statement. This "cut rates first, then pause" strategy would be a repeat of the operation at the end of 2019—when Powell also faced strong opposition from three colleagues to a rate cut.
While this move may provoke dissent from officials who oppose rate cuts, if the recent U.S. economic situation continues, rallying consensus to demonstrate that "further rate cuts are unnecessary" could end the "soap opera" of public disputes among officials.
Another option is to keep interest rates unchanged until the employment and inflation data resulting from the federal government shutdown are released in January, at which point the assessment (whether to cut rates) can be reassessed. However, this move could prolong the public divisions within the Federal Reserve for another seven weeks, and there is no guarantee that the newly released data will resolve the fundamental differences.
Timiraos points out that this division within the Federal Reserve actually reflects a contradictory trend in the US economy, one that is more contradictory than at any point during Powell’s nearly eight-year term: job growth has stalled while inflation remains high—leaking the signs of what economists call stagflation.
Powell's decision will depend on which risk he considers greater, and which risk would be more difficult to correct if he misjudges it.
Despite U.S. inflation nearing 3%—still far from the Fed's 2% target—the Fed cut interest rates twice last month to a range of 3.75%-4% to guard against risks of a weak labor market. A third rate cut in December would align with Powell's August plan to move rates closer to a neutral level—a level that neither stimulates nor inhibits economic activity. The rate cuts are driven by the belief that tariff-related inflation risks have diminished, while a weak labor market is becoming a more pressing concern.
Powell's allies have paved the way for a December rate cut.
Timiraos points out that two of Powell's key allies in the FOMC have hinted that the Fed leadership has not abandoned the strategy of a third rate cut in December.
New York Fed President Williams Last Friday, he stated that he still believed there was "room for further adjustments in the near term... to bring the policy stance closer to the neutral range." Williams' wording was undeniably cautious, especially the word "near term," which may suggest that a rate cut is the least damaging option.
Williams stated that while reducing inflation to 2% is a "top priority," "it is equally important to achieve this without creating excessive risk to the labor market." Following his remarks, the market's implied probability of a December rate cut rose from 40% to around 70%.
San Francisco Fed President Mary Daly, an ally of Powell (who has no voting rights this year), also expressed support for a December rate cut in an interview on Monday, arguing that the likelihood and difficulty of dealing with a sudden deterioration in the job market are greater than the risk of a sudden surge in inflation.
Daly stated, "If the cost increases caused by tariffs accelerate or spread to service prices, we will anticipate and address them in advance—it won't be a price surge like during the pandemic… But regarding the labor market, I'm less confident we can address it in advance. The labor market is already very fragile, and if layoffs start to rise slightly, they could increase significantly in the future."
Timiraos points out that Williams and Daly's comments are significant because officials who opposed interest rate cuts had previously dominated the tone of public debate.
Overcoming the resistance to interest rate cuts will not be easy.
It's worth noting that there may have been a lack of support within the Federal Reserve for a December rate cut from the outset. The dot plot following the September rate cut showed that only a slight majority of the 19 officials present believed that further rate cuts in October and December were necessary. Of course, only 12 of these 19 people have voting rights this year: all seven Federal Reserve governors, the president of the New York Fed, and four of the 11 rotating regional Fed presidents.
Following the second rate cut in October, opposition to a third rate cut has grown increasingly strong. All four regional Federal Reserve presidents with voting rights—including one who voted against it last month (Schmid)—have expressed concern about another rate cut.
These officials found that not only were tariffs causing persistently high price increases for goods (and potentially exacerbating this pressure), but domestic service prices were also rising steadily, indicating that inflation was spreading. They were concerned that the Federal Reserve was cutting interest rates too quickly—moving towards the neutral rate level—while a more restrictive policy should be maintained to curb inflation.
Boston Fed President Collins exemplifies this shift. While she voted to cut rates in October, she told reporters last Saturday that she was "reserved" about further rate cuts, as the current "moderately restrictive" interest rate level may still be necessary to control inflation.
In response, Timiraos cited the views of former Dallas Fed President Kaplan, who worked with Powell from 2015 to 2021, pointing out that those who oppose interest rate cuts have their reasons —when interest rates are close to neutral, the Fed's policy choices are asymmetrical: if the economy performs worse than expected, interest rates can be cut, but if inflationary pressures intensify, too low interest rates may not be able to effectively curb inflation.
However, he currently works at Goldman Sachs. Kaplan also understood how (Powell) could persuade officials who were initially opposed to a certain action to switch their support. He recalled that during his tenure, when he occasionally disagreed with Powell, "I would try my best to side with the chairman, because we both understood that no one is smart enough to know exactly what the right decision is."
(Article source: CLS)
