Analysis of the "Fed's Mouthpiece": Why Has the Path to Fed Rate Cuts Suddenly Become Uncertain?

Hawk-Dove Debate

When policymakers agreed to cut rates by 25 basis points in September, 10 out of 19 officials (just over half) expected further cuts in October and December. The rhythm of three consecutive meetings with rate cuts would echo Powell's cuts last year and in 2019.

However, a group of hawkish officials has questioned the necessity of further cuts. After officials cut rates again at the end of October, bringing the rate to the current range of 3.75% to 4%, their resistance has hardened. According to public comments and recent interviews, the debate over what to do in December has become particularly intense, with hawks strongly opposing the previous assumptions about a third rate cut.

Timiraos emphasized that Powell's blunt rebuttal of the market's expectations for another rate cut during that day's press conference was partly aimed at managing a committee that is seemingly fractured by irreconcilable differences.

The government shutdown has exacerbated these divisions, as it has led to a pause in the release of employment and inflation reports that could help reconcile such differences. This data vacuum has allowed officials to cite private surveys or rumors that reinforce their earlier assessments.

This dynamic reflects the growing voices of two major camps, while the centrists' beliefs have wavered.

Doves are concerned about a weak labor market but lack new evidence to support a strong case for continued rate cuts. Hawks, on the other hand, seize the opportunity to advocate for a pause in rate cuts. They point out that consumer spending remains stable and express concerns that businesses are preparing to pass on price increases related to tariffs to consumers.

Whether officials will cut rates again at the meeting on December 9-10 remains uncertain. New data may put an end to this debate. Some officials believe that the December and January meetings are largely interchangeable, making the year-end deadline seem somewhat contrived. Another possibility is that a rate cut in December could come with guidance that sets a higher threshold for further cuts in the future.

Timiraos stated that this division stems from the current unusual economic conditions: inflation is facing upward pressure while job growth has stagnated, a situation sometimes referred to as "stagflation." Many economists attribute this to the Trump administration's sweeping policy changes on trade and immigration. Diane Swonk, chief economist at KPMG, said, "It's easy to predict that we will experience mild stagflation, but experiencing it firsthand is another matter."

The last official data released before the government shutdown showed that a key inflation indicator was 2.9% in August, which is not only far above the Federal Reserve's 2% target but also higher than the 2.6% seen in the spring of this year, although it is lower than the forecasts made after President Trump raised tariffs earlier this year.

Three Key Questions

Timiraos emphasized that officials currently have disagreements on three key questions, each of which will impact future policy paths.

First, will the price increases driven by tariffs be one-time? Hawks worry that after businesses absorb the first round of tariffs, they will pass on more costs next year, thus keeping price pressures persistent. Doves argue that businesses have so far been reluctant to pass on tariff costs, indicating that demand is too weak to sustain ongoing inflation.

Second, is the decline in monthly job growth—from 168,000 in 2024 to an average of only 29,000 over the three months ending in August—due to weak demand for workers, or is it a result of reduced labor supply due to decreased immigration? If it is the former, maintaining high interest rates poses a risk of recession. If it is the latter, cutting rates may overly stimulate demand.

Third, are interest rates still in a restrictive range? Hawks believe that after cutting rates by 50 basis points this year, rates are at or near a neutral level that neither stimulates nor suppresses growth, thus posing significant risks for further cuts. Doves argue that rates remain restrictive, leaving room for the Federal Reserve to support the labor market without reigniting inflation.

"People just have different risk tolerances," Powell said after the October meeting. "So this leads to different viewpoints."

Powell's Balancing Act

Officials have been debating these issues for months. Powell attempted to quell this debate during his speech in Jackson Hole, Wyoming, in August, arguing that the impact of tariffs would be temporary and that the weakness in the labor market reflected insufficient demand, thus aligning himself with the dovish camp in favor of rate cuts. Data released weeks later proved his strategy correct: job growth had nearly stagnated.

Nevertheless, his stance during this speech was more aggressive than some of his colleagues could accept. By the time of the October 29 meeting, hawks had solidified their positions. Kansas City Fed President Esther George voted against the rate cut that month. Regional Fed presidents without voting rights, including Cleveland Fed President Loretta Mester and Dallas Fed President Lorie Logan, also quickly expressed their opposition to rate cuts.

At the post-meeting press conference, Powell even stated upfront, without waiting for reporters' questions, that a rate cut in December was not a foregone conclusion.

Powell was fulfilling his duty to ensure that the voices of different factions within the committee were heard. This "committee management" helps build consensus when action is needed.

Timiraos also pointed out Powell's "policy history." In the past, Powell has encouraged colleagues to reveal such clues in policy statements released before post-meeting press conferences. According to minutes from a meeting released earlier this year, he said at a Federal Reserve meeting in July 2019, "Press conferences are the worst time to change policy expectations."

Timiraos added that at that time, he faced similar concerns: a hawkish camp resisting rate cuts, with officials worried that investors were too certain about the next steps. Powell and his colleagues released cautious signals through careful wording.

However, last month, expanding the statement to reflect hawkish concerns would have alienated doves, which forced Powell to convey this message personally. Powell said, "There are more and more people who feel that maybe we should at least 'wait a bit' on this issue and observe one more meeting."

The shift in sentiment is illustrated by the change in Chicago Fed President Austan Goolsbee. In September, he was one of two officials who expected only one rate cut this year, placing him between doves who anticipated two more cuts and hawks who hoped for no further cuts.

While it is reasonable to believe that tariffs will only lead to one-time price increases, hawks worry that experiences from the 1970s or 2021-22 suggest that this idea could be very wrong. Goolsbee said in an interview last week, "A three-year 'temporary' price increase cannot be considered temporary."

Divisions Persist

The inflation data released a few days before the October decision was mixed. Overall data was milder than expected due to a sharp slowdown in housing costs. However, hawks noted some unsettling details: the core measure, excluding volatile food and energy prices, saw an annualized growth rate accelerate from 2.4% in June to 3.6% over the past three months. A non-housing services indicator, which should not be directly affected by tariffs, also performed strongly. Goolsbee said, "Inflation is moving in the wrong direction before we see the 'last light' go out."

As hawkish views become increasingly firm, doves have been less vocal in public, but they have not abandoned their positions. Among the doves, three officials appointed by Trump stand out, as Trump has explicitly expressed a desire to lower interest rates.

Milan, a former White House advisor and current board member who joined the Federal Reserve before the September meeting, immediately voted against the cut, advocating for a larger 50 basis point reduction. The other two, governors Bowman and Waller, are among the five final candidates to succeed Powell as Federal Reserve Chair next year.

Doves believe the current situation bears little resemblance to 2021-22 and worry that the Federal Reserve will underreact to the slowdown in the labor market. However, the data interruption is unfavorable for them. While alternative data on employment is abundant, price information is much more scattered. Hawks warn that when the Federal Reserve emerges from the data fog early next year, it may find inflation running at elevated levels.

San Francisco Fed President Mary Daly articulated the dovish perspective in an article on Monday, arguing that the slowdown in wage growth indicates that the slowdown in employment reflects a decline in labor demand rather than a supply shortage. She warned against being overly focused on avoiding 1970s-style inflation, which could stifle a potential productivity boom similar to the 1990s. She wrote that the economy faces the risk of "losing jobs and growth in the process."

Timiraos concluded that even if the data interruption ends, the upcoming data may not easily resolve these divisions, as these disagreements often boil down to judgments about how seriously to take risks that may be distant and emerge months later.