Powell's allies set a strong tone, is a December rate cut by the Fed becoming a high probability event?

Source: Jin10

In the past month, Federal Reserve officials have publicly expressed sharp differences over the possible direction of the economy and the appropriate level of interest rates. These public debates have led economists and market participants to generally question whether there is enough support within the Federal Reserve for another rate cut at the upcoming policy meeting on December 10.

However, there has been a dramatic shift in market sentiment over the past few days—investors and economists now widely believe that the Federal Reserve is likely to take action to lower interest rates in December.

What is the driving force behind this transition? Economists point out that, given the ongoing concerns about the health of the job market, Federal Reserve officials are inclined to cut interest rates again.

Tom Porcelli, Chief Economist at Wells Fargo, stated in an interview: “The deterioration we see in the labor market, I believe, is sufficient to justify the Federal Reserve's interest rate cut in December.”

The first official data released after the government shutdown indicates that the unemployment rate rose to 4.4% in September, reaching the highest level in nearly four years. At the same time, there are signs that the stable situation of the labor market, characterized by “low hiring and low layoffs,” may be at a critical point of deterioration.

Deutsche Bank's Chief U.S. Economist Matthew Luzzetti stated in a report to clients that the job market remains “in a precarious state.”

A more critical turning point comes from the statements of core officials. Josh Hirt, a senior economist at Vanguard, revealed in an interview that he personally believes the Federal Reserve will cut interest rates, with a key basis being the public remarks made last Friday by New York Fed President Williams—who is a close ally of Fed Chair Powell. Williams explicitly advocated for a rate cut and stated, “still believes there is room for further adjustments to interest rates in the short term.”

This statement directly ignited the financial markets, with the expectation of a rate cut in December soaring from nearly 40% a day earlier to over 70%. Hett said bluntly: “I think the market's interpretation of this is accurate.”

He further added that Williams' position means that the three most influential officials of the Federal Reserve—Powell, Williams, and Fed Governor Waller—are all in favor of a new round of easing actions. “We believe this is a very substantial camp that is hard to shake.”

Ethan Harris, the former chief economist at Bank of America Securities, also pointed out that the economy is showing more convincing signs of weakness, which forces the Federal Reserve to take action.

“Precise transmission” of signals from top Federal Reserve officials

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

Signals from the top levels, especially the statements of the chairman, vice chairman, and the highly influential president of the New York Federal Reserve, have been carefully weighed: they need to convey clear policy ideas while avoiding triggering excessive reactions in the financial markets.

This is precisely why the speech given by the current president of the New York Federal Reserve, Williams, last Friday was significant for the market. By virtue of his position, he is one of the members of the Fed's leadership “trio”, the other two being Chairman Powell and Vice Chairman Jefferson.

Therefore, when Williams hinted at “the possibility of further adjustments to interest rates in the short term,” investors interpreted it as a clear signal released by the higher-ups: the leadership is inclined to lower interest rates at least once more in the near future, with the most likely timing being the December Federal Open Market Committee (FOMC) meeting.

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

“Although Williams may just be expressing a personal opinion, the signals issued by members of the Federal Reserve's 'three giants' on key current policy issues are almost always approved by the Chair; without Powell's signature agreement, sending such signals would be a professional misconduct.” he added.

Core of Internal Disagreement: Three Major Controversies Hard to Reconcile

Despite the growing consensus on interest rate cuts, economists still expect that one or more Federal Reserve officials advocating for keeping interest rates stable will cast dissenting votes at the meeting.

Other officials have not been as supportive of interest rate cuts as Williams. Boston Fed President Collins and Dallas Fed President Logan have both expressed hesitation about further rate cuts. Collins openly voiced concerns about inflation in an interview with CNBC; Logan has taken a more hawkish stance, stating that she is even unsure whether she would vote in favor of the previous two cuts. It is important to note that Collins has voting rights on the FOMC this year, while Logan's voting rights will take effect in 2026.

Harris stated that, looking at it from a broader perspective, the Federal Reserve is facing an “impossible challenge”: the current economy is showing signs of stagflation—high inflation coexisting with high unemployment—and there is no clear Federal Reserve policy response to this situation, which has also led to profound divisions within the rate-setting committee. “There are some very fundamental disagreements.”

The first point of divergence is whether the current Federal Reserve policy is contractionary or accommodative. Officials concerned about inflation believe that monetary policy operates through the capital markets, and since the current performance of the capital markets is strong, this suggests that the policy may be in an accommodative state; however, officials supporting rate cuts counter that the financial conditions in key sectors such as housing remain tight.

The second point of divergence revolves around the interpretation of inflation. Doves like Williams argue that if the temporary impact of tariffs is excluded, the inflation level would be lower; however, inflation hawks have observed signs of rising inflation in sectors not affected by tariffs.

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

Harris said, “This will be an intriguing vote.” He added that the final decision may be finalized at the meeting site.

Special Background: Considerations of Data Vacuum and “Insurance Rate Cuts”

Former Cleveland Fed President Mester analyzes that Powell may use the press conference on December 10 to convey a key message: this interest rate cut is an “insurance cut,” and the Fed will then observe the economic response.

It is worth noting that due to the record-long government shutdown, the Federal Reserve will not be able to obtain the latest employment and inflation data from the government during this meeting, which means that decisions will be made to some extent in a “data vacuum.”

Hert from the Pioneer Group also pointed out that the speeches of those Federal Reserve officials who oppose the interest rate cut in December send an important signal to the market: the Federal Reserve is not “cutting rates for the sake of cutting rates,” thus preventing the bond market from pricing in higher inflation expectations. “This limits the negative consequences that rate cuts may bring in a situation where inflation is high and the labor market has not obviously fallen into distress.”