「Fed Whisperer」 Analysis: Why Did the Fed's Rate Cut Path Suddenly Hit a Snag?

Original Article Title: "Analyzing the 'Fed Whisperer': Why Did the Fed's Rate Cut Path Suddenly Hit a Snag?"

Original Source: Golden Tang Data

The 'Fed Whisperer' Nick Timiraos's latest article points out that during Fed Chair Powell's nearly eight-year term, an almost unprecedented level of internal division within the central bank has emerged, casting a shadow over the future rate-cutting path.

Officials are divided internally, with the focus of the debate on whether persistent inflation or a weak labor market poses a greater threat. Even the resumption of official economic data releases may not be enough to bridge these divides.

Although investors generally believe that the Fed is still likely to cut rates at the next meeting, this internal rift has made a plan that seemed feasible less than two months ago now more complicated.

Hawk-Dove Debate

When policymakers agreed to cut rates by 25 basis points in September, 10 out of the 19 officials (barely a majority) expected further cuts in October and December. The pace of three consecutive rate cuts would echo Powell's rate cuts last year and in 2019.

However, a group of hawkish officials questioned the need for further cuts. After officials cut rates again at the end of October, bringing rates to the current range of 3.75% to 4%, their resistance became stronger. Based on public comments and recent interviews, the debate on how to act in December was particularly fierce, with hawks strongly opposing the earlier assumption of a third rate cut.

Timiraos emphasizes that, in fact, Powell's blunt rebuttal of the market's expectations for another rate cut at that day's press conference was largely aimed at managing a committee that has become so divided and fractured due to what appears to be an unbridgeable rift.

The government shutdown exacerbated this division as it led to a pause in the release of employment and inflation reports that could have helped reconcile such differences. This data vacuum allowed officials to each cite those surveys or rumors that could strengthen their prior assessments.

This dynamic reflects the growing voices of the two major camps, while the beliefs of the moderates have begun to waver.

The doves are concerned about a weak labor market but lack new evidence to strongly support further rate cuts. The hawks seize the opportunity to advocate for a pause in rate cuts. They point out that consumer spending is stable and express concerns that businesses are preparing to pass on tariff-related price increases to consumers.

Whether officials will cut interest rates again at the December 9-10 meeting remains unknown. New data could help settle this debate. Some officials see little difference between a December and a January cut, making the year-end deadline seem somewhat arbitrary. Another possibility is that a December rate cut could come with enhanced guidance setting a higher bar for future cuts.

Timiraos notes that this split stems from the current unusual economic situation: inflation is facing upward pressure while job growth remains stagnant, a scenario sometimes referred to as "stagflation." Many economists attribute this to the Trump administration's comprehensive policy shifts on trade and immigration. KPMG Chief Economist Diane Swonk said, "Predicting we'd have a mild case of stagflation was relatively easy, but living through it is another matter."

The final official data released before the government shutdown showed a key inflation indicator at 2.9% in August, not only well above the Fed's 2% target but also higher than the 2.6% in the spring and lower than forecasts following President Trump's earlier tariff increases.

Three Key Questions

Timiraos emphasizes that officials are currently divided on three key questions, each of which will shape future policy.

First, will the tariff-driven price hikes be one-off? Hawks fear that after absorbing the initial round of tariffs, companies will pass on more costs next year, sustaining price pressure. Doves believe that companies have been reluctant to fully pass on tariff costs so far, indicating weak demand that cannot support persistent inflation.

Second, is the recent slowdown in monthly job gains—from 168,000 in 2024 to an average of just 29,000 over the three months ending in August—due to softening labor demand or a lack of labor supply from reduced immigration? If it's the former, keeping rates high risks recession. If it's the latter, a rate cut could risk overheating demand.

Third, are rates still in a restrictive range? Hawks argue that after this year's 50-basis-point cut, rates are at or near a neutral level that neither stimulates nor restrains growth, posing a significant risk in further cuts. Doves believe rates are still restrictive, providing room for the Fed to support the labor market without reigniting inflation.

"It's just that people's tolerance for risk is different," Powell said after the October meeting. "So that leads to different viewpoints."

Powell's Balancing Act

Officials have debated these issues for months. In his August speech at the Jackson Hole, Wyoming, Powell sought to calm this debate, arguing that the impact of tariffs would be temporary and that the soft labor market reflected insufficient demand, thus siding with the doves in support of a rate cut. Data released a few weeks later proved his strategy right: Job growth almost stalled.

Nevertheless, the stance of this speech was more radical than some colleagues could accept. By the meeting on October 29, the hawks had solidified their position. Kansas City Fed President Schmieding voted against a rate cut that month. Regional Fed presidents without voting rights, including Cleveland Fed President Hamrick and Dallas Fed President Logan, also quickly and publicly voiced opposition to a rate cut.

At the post-meeting press conference, Powell even cut to the chase without waiting for questions, stating upfront that a December rate cut was not set in stone.

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

Timiraos also pointed out Powell's "policy history." In the past, Powell encouraged colleagues to hint at such clues in policy statements released before the post-meeting press conference. According to minutes released earlier this year from a Fed meeting in July 2019, he said at one meeting, "The worst time to change policy expectations is in a press conference."

Timiraos added that at the time, he faced similar concerns: a hawkish camp resisting a rate cut, officials worried that investors were too certain about the next steps. Powell and his colleagues carefully worded their messages to send cautious signals.

But last month, if expanding the scope of the statement to reflect hawkish concerns would alienate the doves, Powell had to convey this information personally. Powell said, "Now more and more people are thinking that maybe we should at least 'wait' on this issue, observe one more meeting, and then decide."

Chicago Fed President Golsby's change illustrates this shift in sentiment. In September, he was one of two officials expecting only one rate cut this year, positioning him between the doves expecting two more cuts and the hawks hoping for no more cuts.

While it is reasonable to assume that tariffs will only lead to a one-time price hike, the hawks are concerned that the experiences of the 1970s or 2021-22 suggest that this idea may be way off base. In an interview last week, Golsby said, "A three-year 'temporary' price increase cannot be considered temporary."

Hard to Bridge the Divide

September inflation data, released a few days before the October meeting, was a mix of good and bad news. Due to a sharp slowdown in housing costs, the overall data was milder than expected. However, hawks noted some concerning details: the core index, which excludes volatile food and energy prices, saw its annualized growth rate over the past three months accelerate from 2.4% in June to 3.6%. A non-housing services gauge, which should not be directly affected by tariffs, also showed resilience. Gulbis remarked, "Inflation is heading in the wrong direction as we see the 'last light' extinguished."

As hawkish views have become increasingly entrenched, doves have reduced their public commentary, but they have not abandoned their stance. Among doves, three officials appointed by Trump stand out, and Trump has made it clear that he hopes for rate cuts.

Former White House advisor and now Director Milani, who joined the Fed in September ahead of the meeting, immediately dissented, advocating for a larger 50 basis point rate cut. The other two, Directors Bauman and Waller, are among the five final candidates to succeed Powell as Fed Chair next year.

Doves argue that the current situation bears little resemblance to 2021-22 and are concerned that the Fed may not react sufficiently to labor market slack. However, the data interruption has not been in their favor. While alternative data on employment abounds, price information is much more scattered. Hawks caution that when the Fed emerges from the data fog early next year, they may find inflation running high.

San Francisco Fed President Daly outlined the doves' view in an article on Monday, suggesting that slowing wage growth indicates a decline in labor demand rather than a supply shortage. She warned against stifling potential productivity booms like those seen in the 1990s by being overly focused on avoiding 1970s-style inflation. She wrote that the economy faces the risk of "losing jobs and growth in this process."

Timiraos concludes that even as the data hiatus ends, upcoming releases may not easily resolve these disagreements because they often boil down to judgments on how seriously to take risks that may be distant and only materialize months from now.

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