Original Title: "Analysis of the 'Federal Reserve's Mouthpiece': Why Has the Path to Interest Rate Cuts Suddenly Become Uncertain?"
Original Source: Jin10 Data
Nick Timiraos, the "Federal Reserve's Mouthpiece," recently pointed out that during Federal Reserve Chairman Jerome Powell's nearly eight-year tenure, an unprecedented internal division is emerging within the central bank, casting a shadow over the future path of interest rate cuts.
A rift has developed among officials, with the debate focusing on whether persistent inflation or a weak labor market poses a greater threat. Even if official economic data resumes publication, it may not bridge these divides.
Although investors generally believe that the likelihood of the Federal Reserve cutting rates at the next meeting remains high, this internal split has complicated plans that seemed feasible less than two months ago.
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 rate-cutting pace from last year and 2019.
However, a group of hawkish officials has questioned the necessity of further rate 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 become more pronounced. According to public comments and recent interviews, the debate over actions in December has been particularly intense, with hawks strongly opposing the previous assumptions about a third rate cut.
Timiraos emphasized that, in fact, 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 this divide, as it has led to a pause in the release of employment and inflation reports that could help reconcile such differences. This data vacuum allows 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 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 tariff-related price increases 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 setting a higher threshold for further cuts in the future.
Timiraos stated that this divide 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 comprehensive policy changes on trade and immigration. Diane Swonk, chief economist at KPMG, stated, "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 in August was 2.9%, which is not only well 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 generated after President Trump's earlier increase in tariff rates.
Three Key Questions
Timiraos emphasized that officials currently have disagreements on three key questions, each of which will impact future policy paths.
First, will tariff-driven price increases be one-time events? Hawks worry that after businesses digest the first round of tariffs, they will pass on more costs next year, leading to persistent price pressures. Doves, on the other hand, believe that businesses have been reluctant to pass on tariff costs so far, 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 a labor supply shortage caused by reduced 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 argue 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 contend 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 stated after the October meeting. "So this leads to people holding different views."
Powell's Balancing Act
Officials have been debating these issues for months. Powell attempted to quell this debate in his August speech in Jackson Hole, Wyoming, 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 side advocating for rate cuts. Data released weeks later proved his strategy correct: job growth had nearly stagnated.
Nevertheless, the stance taken in 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 outright, 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 stated at a Federal Reserve meeting in July 2019, "The press conference is the worst time to change policy expectations."
Timiraos added that at that time, he faced similar concerns: a hawkish faction resisting rate cuts, with officials worried that investors were too certain about the next steps. Powell and his colleagues released cautious signals by carefully choosing their words.
However, last month, expanding the statement to reflect hawkish concerns would have alienated doves, forcing Powell to convey this message personally. Powell said, "There are more and more people who feel that maybe we should at least 'wait' 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 the dovish camp expecting two more cuts and the hawkish camp hoping 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 thinking could be very wrong. Goolsbee stated in a recent interview, "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. Due to a sharp slowdown in housing costs, the overall data was milder than expected. However, hawks noted some disturbing details: the core measure, excluding volatile food and energy prices, accelerated to an annualized growth rate of 3.6% over the past three months, up from 2.4% in June. A non-housing services measure, which should not be directly affected by tariffs, also performed strongly. Goolsbee remarked, "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 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 board member who joined the Federal Reserve before the September meeting, immediately cast a dissenting vote, advocating for a larger 50 basis point cut. 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 may underreact to the slowdown in the labor market. However, the data interruption works against 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 high 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 they often boil down to judgments about how seriously to take risks that may be distant and emerge months later.
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