Written by: White55, Mars Finance

As the Federal Reserve policymakers increasingly diverge between hawkish and dovish stances, Chairman Powell faces a daunting coordination task at this week's central bank meeting. Although the market generally expects the Fed to cut interest rates again, the real challenge lies in the communication of policy after the decision. Powell needs to carefully balance the opposing internal views and leave room for flexibility in future policy paths.

Internally Deeply Divided Committee

Currently, the level of disagreement within the Federal Open Market Committee (FOMC) is considered the most severe during Powell's nearly eight-year tenure. This division is directly reflected in the distribution of voting rights: among the 12 voting members, five have expressed opposition or skepticism regarding further rate cuts.

Since 2019, there has never been a situation in FOMC meetings where three or more members voted against a decision, and this has only occurred nine times since 1990. Therefore, the market is highly focused on whether this meeting will see a high number of dissenting votes, a situation not encountered in many years, which itself reflects the complexity and uncertainty of policy-making.

This profound division is rooted in different interpretations of the contradictory state of the U.S. economy.

One side (doves) is more concerned about signs of weakness in the labor market. For example, New York Fed President Williams believes that the downside risks to the labor market have increased, while upward inflationary pressures have eased, thus advocating that "there is still room for further rate cuts in the near term."

On the other side (hawks), there are concerns about the stickiness of inflation. Boston Fed President Collins and other officials emphasize that inflation progress has stalled, and the current "moderately restrictive" level of monetary policy is necessary to ensure inflation returns to the 2% target, thus taking a cautious stance on further rate cuts. This differing emphasis on the contradictory economic data makes it difficult for the committee to form a unified opinion.

Communication Strategy of "Hawkish Cut"

In the face of such internal divisions, market analysts believe that Powell is most likely to adopt a communication strategy known as a "hawkish cut." This means that the Fed may approve a 25 basis point rate cut at the December meeting, but Powell will strive to avoid sending strong signals about a future easing cycle in the post-meeting press conference, especially setting thresholds for another rate cut in January. Analysts at Bank of America point out that Powell may attempt to balance the expected rate cut action with hawkish language.

Specifically, his communication strategy may focus on two aspects:

First, emphasizing that future policy decisions will strictly depend on data, particularly the upcoming employment and inflation data, suggesting that this rate cut is not the beginning of a prolonged easing cycle.

Second, he may convey signals that interest rates are approaching "neutral rate" levels. The neutral rate refers to the interest rate level that neither stimulates nor restrains the economy. By implying that the policy stance may soon shift from restrictive to neutral, Powell can attempt to assure hawkish committee members that the Fed is not moving towards excessive easing.

However, the execution of this communication strategy faces significant challenges. Powell needs to soothe the hawkish voices internally while not being overly dovish, lest the market interprets it as a pause in the easing cycle, which could lead to inappropriate tightening of financial conditions. He must find a delicate balance between conflicting objectives.

Decision-Making Amid Data Gaps and Political Pressure

The Fed's decision-making faces a unique dilemma due to the absence of key economic data. Due to the ongoing federal government shutdown, a series of important economic data, including the October employment report, has been delayed. This forces policymakers to make judgments in an information-deficient "data vacuum," akin to "driving in fog" and having to slow down. The lack of data not only increases the risk of policy misjudgment but also makes it difficult for Powell to rely on clear data support when explaining decisions, necessitating greater reliance on overall judgments about the economic outlook and alternative data from the private sector.

At the same time, political pressure is also a significant factor. President Trump has repeatedly publicly pressured the Fed to cut rates and is considering nominees for the next Fed chair. This external pressure on the potential independence of the Fed's monetary policy significantly elevates the political and economic weight of this meeting. Powell has previously stated that the Fed's policy decisions are "based on data, not politics," but maintaining this principle in such a complex context requires immense composure and wisdom.

Future Path: Uncertainty Becomes the New Normal

Regardless of the outcome of the December meeting, the future policy path of the Fed is fraught with uncertainty. There is a gap between market expectations and the Fed's official guidance: the futures market currently prices in further rate cuts after January, while some Fed officials prefer to adopt a wait-and-see attitude after this rate cut. Powell may reserve flexibility for future actions. One possible communication approach is to emphasize that whether further rate cuts are needed will depend on whether the labor market shows signs of "further significant weakness." This means that if subsequent economic data, particularly employment data, deteriorates significantly, the Fed may still take action. Conversely, if inflation data unexpectedly rebounds strongly, it could support the hawkish view, leading to interest rates being maintained at high levels for a longer period.

Additionally, the academic debate regarding the level of the "neutral rate" also indicates the long-term complexity of policy-making. FOMC members have significant differences in their estimates of the neutral rate, ranging from 2.6% to 3.9%. This fundamental divergence means that even after short-term data-driven decisions, there will still be difficulty in reaching a consensus within the Fed on the fundamental question of what level interest rates should ultimately be lowered to, making the future policy path unlikely to be smooth.

In summary, Chairman Powell's core task at this meeting is to seek a fragile balance within a severely divided committee, using the strategy of a "hawkish cut" to appease both internal and external parties, while striving to maintain the Fed's policy independence and credibility under the dual constraints of data absence and political pressure. Regardless of the outcome, high uncertainty and market volatility are likely to become the new normal for the foreseeable future.

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