With Powell's allies setting the tone, a Fed rate cut in December is now highly probable.

Original source: Jinshi Data

Over the past month, Federal Reserve officials have publicly engaged in sharp disagreements regarding the likely direction of the economy and the appropriate level of interest rates. These public debates have led economists and market participants to widely question whether there is sufficient internal support within the Fed to cut interest rates again at its upcoming policy meeting on December 10.

However, market sentiment has shifted dramatically in the past few days – investors and economists now widely believe that the Federal Reserve is highly likely to cut interest rates in December.

What is the core driver of this shift? Economists point out that, given persistent concerns about the health of the job market, Federal Reserve officials are leaning towards another rate cut.

"The deterioration we're seeing in the labor market is, in my opinion, a reasonable justification for a Fed rate cut 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. Meanwhile, there are signs that the stable trend of "low hiring, low layoffs" in the labor market may be nearing a tipping point of deterioration.

In a report to clients, Deutsche Bank’s chief U.S. economist, Matthew Luzzetti, bluntly stated that the job market remains “in a precarious state.”

A more crucial turning point came from the statements of key officials. Vanguard senior economist Josh Hirt revealed in an interview that he personally judged the Federal Reserve would cut interest rates, and the key basis for this judgment was the public remarks made by New York Fed President Williams last Friday. As a close ally of Fed Chairman Powell, Williams explicitly advocated for a rate cut and stated that he "still believes there is room for further adjustments to interest rates in the near term."

This statement immediately triggered a surge in financial markets, with expectations for a December rate cut soaring from nearly 40% the day before to over 70%. Hurt stated bluntly, "I think the market's interpretation of this is accurate."

He further added that Williams's stance means that three of the Fed's most influential officials—Powell, Williams, and Fed Governor Waller—all support a new round of easing. "We believe this is a very strong camp that is difficult to shake."

Ethan Harris, former chief economist at BofA Securities, also pointed out that the economy is showing more convincing signs of weakness, forcing the Federal Reserve to take action.

The "precise delivery" of signals from top Federal Reserve officials

The Federal Reserve’s communication—especially at the highest levels—is rarely accidental.

The signals from top management, especially the statements from the chairman, vice chairman, and the highly influential president of the New York Federal Reserve, were carefully weighed: they aimed to convey a clear policy direction while avoiding triggering an overreaction in the financial markets.

This is precisely why the speech by current New York Fed President Williams last Friday was so significant to the market. By virtue of his position, he is one of the Fed's "Big Three," the other two being Chairman Powell and Vice Chairman Jefferson.

Therefore, when Williams hinted at the possibility of further interest rate adjustments in the near term, investors interpreted it as a clear signal from the top leadership: the leadership is inclined to cut rates at least once more in the near future, with the most likely time being the Federal Open Market Committee (FOMC) meeting in December.

In a client report, Krishna Guha, Global Head of Policy and Central Bank Strategy at Evercore ISI, analyzed: "While the phrase 'in the short term' is somewhat ambiguous, the most direct interpretation is the next meeting."

"While Williams may simply be expressing his personal opinion, signals from the Fed's 'Big Three' on key current policy issues are almost always approved by the Chairman; it would be professional misconduct for him to send such signals without Powell's signature," he added.

Core of Internal Disputes: Three Inconclusive Disputes

Despite the growing consensus on interest rate cuts, economists still expect one or more Federal Reserve officials who advocate for maintaining stable interest rates to vote against it at the meeting.

Other officials were not as vocal in their support for rate cuts as Williams. Boston Fed President Collins and Dallas Fed President Logan both expressed hesitation about further rate cuts. Collins, in an interview with CNBC, openly expressed his concerns about inflation; Logan was more hawkish, saying she wasn't even sure if she would have voted in favor of the previous two rate cuts. It's worth noting that Collins has a vote on the FOMC this year, while Logan's vote will not take effect until 2026.

Harris stated that, looking at the situation from a different perspective, the Federal Reserve is facing an "impossible challenge": the current economy is exhibiting characteristics of stagflation—high inflation and high unemployment coexisting—and there is no clear policy response from the Fed, leading to profound disagreements within the interest rate setting committee. "There are some very fundamental disagreements."

The first point of contention is whether the current Federal Reserve policy is tightening or loosening. Officials concerned about inflation argue that monetary policy operates through capital markets, and the current strong performance of capital markets suggests that policy may already be loose; officials who support rate cuts counter that financial conditions in key sectors such as housing remain tight.

The second point of contention revolves around the interpretation of inflation. Officials advocating for rate cuts, such as Williams, argue that inflation would have been lower if the temporary effects of tariffs were removed; however, officials concerned about inflation find signs of rising inflation in sectors unaffected by tariffs.

In addition, all Federal Reserve officials are puzzled by a paradox: how can a weak job market coexist with strong consumer spending?

"This will be an intriguing vote," Harris said, adding that the final decision could be made at the meeting.

Special Context: Data Vacuum and Considerations for "Insurance-Driven Interest Rate Cuts"

Former Cleveland Fed President Loretta Mester analyzed that Powell might use the December 10 press conference to convey a key message: this rate cut is an "insurance rate cut," after which the Fed will observe the economy's response.

It is worth noting that due to the record-long government shutdown, the Federal Reserve will not be able to obtain the latest employment and inflation data from the government at this meeting, which means that the decision will be made in a "data vacuum" to some extent.

Vanguard's Hertt also pointed out that the speeches by Fed officials who opposed a December rate cut sent an important signal to the market: the Fed is not "cutting rates for the sake of cutting rates," thereby preventing the bond market from pricing in higher inflation expectations. "This limits the potential negative consequences of a rate cut in a context of high inflation and no obvious distress in the labor market."