With Powell's allies making a significant statement, a December rate cut seems highly likely.

Author: Wu Yu, 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 doubt whether there is sufficient internal support within the Fed to cut interest rates again at the upcoming policy meeting on December 10.

However, market sentiment has dramatically shifted in the past few days—investors and economists now generally believe that the Fed is highly likely to cut interest rates in December.

What is the core driving force behind this shift? Economists point out that, given continued concerns about the health of the job market, Fed officials are leaning towards another rate cut.

"The deterioration we're seeing in the labor market, I think, is enough to justify a Fed rate cut in December," said Tom Porcelli, chief economist at Wells Fargo, in an interview. The first official data released after the government shutdown showed the unemployment rate climbed to 4.4% in September, the highest level in nearly four years. Meanwhile, there are signs that the stable "low hiring, low laying off" trend in the labor market may be on the verge of deterioration. Matthew Luzzetti, chief U.S. economist at Deutsche Bank, stated bluntly in a report to clients that the job market remains "in a precarious state." An even more crucial turning point came from statements by key officials. In an interview, Vanguard senior economist Josh Hirt revealed 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 rate adjustments in the near term." This statement directly triggered a surge in financial markets, with expectations of a December rate cut soaring from nearly 40% the day before to over 70%. Hirt stated bluntly, "I think the market's interpretation of this is accurate." He further added that Williams' stance means that three of the Fed's most influential officials—Powell, Williams, and Fed Governor Waller—all support a new round of easing measures. “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 Transmission” of Signals from Top Fed Officials The Fed’s communication—especially at the highest levels—is rarely accidental. Signals from top levels, particularly statements from the chairman, vice chairman, and the highly influential president of the New York Fed, are carefully weighed: 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, most likely at the December Federal Open Market Committee (FOMC) meeting. Krishna Guha, Global Head of Policy and Central Bank Strategy at Evercore ISI, analyzed in a client report: “While the phrase ‘in the near term’ is somewhat ambiguous, the most direct interpretation is the next meeting.” He added, “Although Williams may only 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.” The core of the internal divisions: Three major controversies are difficult to reconcile. Despite the growing consensus on interest rate cuts, economists still expect one or more Fed officials who advocate maintaining stable interest rates to vote against them at the meeting. Other officials have not been 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 openly expressed concerns about inflation in an interview with CNBC; Logan was more hawkish, saying she wasn't even sure if she would vote 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 only become effective in 2026. Harris stated that, looking at the situation from a different perspective, the Federal Reserve faces an "impossible challenge": the current economy exhibits 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 Fed policy is tightening or loosening. Officials concerned about inflation believe that monetary policy operates through the capital markets, and the current strong performance of the capital markets suggests that policy may already be loose; officials supporting rate cuts argue 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 be 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: why do a weak job market and strong consumer spending coexist? Harris stated, "This will be an intriguing vote." He added that the final decision may be made at the meeting. Special Context: Data Vacuum and Considerations for an "Insurance Cut" Former Cleveland Fed President Mester analyzed that Powell may use the December 10th press conference to convey a key message: this rate cut is an "insurance cut," after which the Fed will observe the economy's response. It is noteworthy that due to the record-long government shutdown, the Fed will be unable to obtain the latest employment and inflation data from the government at this meeting, meaning that the decision will be made under a certain degree of "data vacuum." Vanguard's Hurt 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" to prevent 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 apparent distress in the labor market."