Fissures Widen Within the Federal Reserve as Rate Cut Prospects Remain Uncertain
With just a month before the December policy meeting, divisions within the Federal Reserve are deepening. Interest rate futures indicate that the market's expectation for a 25-basis-point rate cut has dropped to 63%, and investors' confidence in the Fed's future course of action is gradually wavering. The conflicting signals of declining inflation and slowing employment present a challenging dilemma for monetary policy.
The "Cautious Camp" Calls for Steadfastness
St. Louis Fed President Mussallem recently emphasized in an interview that the Federal Reserve needs to be cautious at this stage to prevent excessive easing from sparking new inflation risks. He noted that inflation levels remain close to 3%, well above the 2% target, and asset prices remain high with a robust real estate market, indicating that financial conditions have not tightened significantly. Mussallem believes, "There is very limited room for further rate cuts before the task of containing inflation is complete."
Kansas City Fed President Schmied expressed a similar stance earlier, reiterating after voting against a rate cut last month that now is not the time for further easing. Analysts suggest that hawkish voices might gain more support at the December meeting.
Divergence Widens Between "Moderates" and "Doves"
In contrast to the hawks, San Francisco Fed President Daly believes that the labor market is cooling, and the slowdown in wage growth suggests that inflation pressures may be easing. She mentioned that productivity gains from artificial intelligence may allow the economy to continue growing in a low-inflation environment, providing room for moderate rate cuts.
Meanwhile, Fed Governor Milan's stance is more aggressive. He is calling for a direct 50-basis-point rate cut at the December meeting, asserting that "current data is sufficient to justify faster easing" and highlighting that the Fed needs to preemptively address downside economic risks. Milan also emphasized the lag effect of policy transmission, warning that "waiting for inflation to fully reach the target before acting may miss the window to stabilize the economy."
Employment Data Becomes a Crucial Variable
Due to the government shutdown causing an interruption in official statistics, the Fed's understanding of the labor market is facing an information gap. The Chicago Fed's estimate report suggests that the unemployment rate in October might have risen to 4.4%, a four-year high. Simultaneously, a consumer expectations survey by the New York Fed indicates a rise in public pessimism about future employment, with an increasing proportion believing that "unemployment will rise in the coming year."
However, some analysts argue that the current job market remains resilient. Reports from Citigroup and Wells Fargo note that while corporate layoff announcements have increased, unemployment benefit claims remain low, indicating signs of systemic deterioration in the job market have not yet emerged.
Market Expectations and Policy Tensions
With inflation stabilizing, economic slowdown, and unclear policy stances, investors' bets on the Federal Reserve's December meeting have become divided. The Chicago Mercantile Exchange's "FedWatch" tool shows that market expectations of a rate cut have dropped from 70% last week to 63%.
Analysts believe Fed Chairman Powell will face a tough decision: On the one hand, inflation has not entirely fallen back to the target range; on the other hand, insisting on tightening could pose deeper economic risks. More data on labor and inflation in the coming weeks may become the key factors determining the policy direction in December.
