Powell Ally's Strong Hint, December Rate Cut "Reversal" into a High Probability Event?

Original Title: "Powell Ally Sets the Tone! Fed Rate Cut in December Once Again Likely?"

Original Source: FXStreet

Over the past month, Federal Reserve officials have openly exhibited sharp disagreements on the possible path 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 enough support within the Fed to cut rates again at the policy meeting scheduled for December 10.

However, in the past few days, there has been a dramatic shift in market sentiment - investors and economists now generally believe that the Fed is likely to take rate-cut action in December.

What has been the key driver of this shift? Economists point out that given the continued concerns about the health of the labor market, Fed officials are inclined to cut rates again.

Tom Porcelli, Chief U.S. Economist at RBC Capital Markets, said in an interview, "The deterioration we are seeing in the labor market, I think is sufficiently compelling to make a case for the Fed to cut rates in December."

The first official data released after the government shutdown ended showed the unemployment rate rising to 4.4% in September, reaching the highest level in nearly four years. At the same time, there are indications that the labor market's stable trend of "low hiring, low firing" may be at a tipping point towards deterioration.

Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, bluntly stated in a report to clients that the job market is still "in a precarious state."

A more crucial turning point comes from statements by key officials. Josh Hirt, Senior Economist at Vanguard, revealed in an interview that his personal judgment is that the Fed will cut rates, with the key basis being last Friday's remarks by New York Fed President Williams— 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 short term."

This statement directly ignited the financial markets, with expectations of a December rate cut surging from just under 40% the day before to over 70%. Hirt stated, "I think the market's interpretation of this is accurate."

He further added that Williams' stance implies that the Fed's three most influential officials—Powell, Williams, and Fed Governor Brainard—all support a new round of easing measures. "We believe this is a heavily-weighted camp that is hard to shake."

Former Chief Economist of Bank of America Securities Ethan Harris also pointed out that the economy is showing more convincing signs of softness, forcing the Federal Reserve to take action.

The "Precision Communication" of Federal Reserve Leadership

The Federal Reserve's communication—especially at the highest levels—is rarely accidental.

Signals from the top, particularly statements from the Chair, Vice Chair, and the highly influential New York Fed President, are carefully weighed: they aim to convey a clear policy path while avoiding triggering overreactions in the financial markets.

This is why last Friday's speech by current New York Fed President Williams was significant to the market. In his role, he is a member of the Federal Reserve's leadership "three-headed monster," alongside Chair Powell and Vice Chair Clarida.

Therefore, when Williams hinted at the "possibility of further rate adjustments in the near term," investors interpreted it as a clear signal from the leadership: a leaning towards at least one more rate cut in the near future, with the most likely timing being the December Federal Open Market Committee (FOMC) meeting.

Krishna Guha, Head of Global Policy and Central Bank Strategy at Evercore ISI, analyzed in a client report: "While the term 'near term' has some ambiguity, the most straightforward interpretation is the next meeting."

"Although Williams may have been expressing a personal view, signals from Federal Reserve leadership 'three-headed monster' members on key existing policy issues are almost always cleared through the Chair; issuing such a signal without Powell's sign-off would be extraordinary," he added.

Key Internal Disagreements: The Core of Three Unresolved Controversies

Despite the warming rate cut consensus, economists still expect one or more Federal Reserve officials advocating for maintaining stable rates to cast dissenting votes at the meeting.

Other officials have not been as supportive of rate cuts as Williams. Boston Fed President Collins and Dallas Fed President Logan have expressed hesitancy towards further rate cuts. Collins openly expressed concerns about inflation in a CNBC interview, while Logan, a hawk, even stated she was unsure if she would vote in favor of the previous two rate cuts. It is worth noting that Collins has a voting position on the FOMC this year, while Logan's voting rights will take effect in 2026.

Harris stated that stepping back, the Federal Reserve is facing an "impossible challenge": the current economy exhibits stagflation characteristics—high inflation coexisting with high unemployment, with no clear Fed policy response, leading to deep divisions within the rate-setting committee. "There are some very fundamental divisions."

The first point of contention is whether the current Federal Reserve policy is considered tight or loose. Officials concerned about inflation believe that monetary policy operates through the capital markets, and given the current strong performance of the capital markets, this suggests that policy may already be in a loose state; officials supporting a rate cut, however, argue that the financial conditions in key sectors such as housing are still at tight levels.

The second point of contention revolves around the interpretation of inflation. Rate-cut advocates such as Williams argue that if the temporary impact of tariffs is excluded, the inflation level would actually be lower; but officials worried about inflation have observed signs of inflation rising in sectors unaffected by tariffs.

In addition, all Federal Reserve officials are puzzled by a contradictory phenomenon: why a weak job market and strong consumer spending coexist.

Harris said: "This will be an intriguing vote." He added that the final decision may be made on-site at the meeting.

Special Context: Data Void and Consideration of "Insurance Rate Cut"

Former Cleveland Fed President Mester analyzed that Powell may use the press conference on December 10 to convey a key message: this rate cut is an "insurance rate cut," and the Fed will then wait and see how the economy reacts.

It is worth noting that due to the record-length government shutdown, the Fed will not have access to the latest government employment and inflation data at this meeting, meaning that the decision will be made to some extent in a "data void."

Vanguard Group's Hirt also pointed out that the speeches of those Fed officials who oppose a rate cut in December send an important signal to the market: the Fed is not cutting rates just for the sake of cutting rates, thereby preventing higher inflation expectations from being priced into the bond market. "This limits the potential negative consequences of a rate cut in a situation where inflation is high and the labor market is not significantly troubled."