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The Federal Reserve’s “Civil War” escalates! Interest rate cut in December?
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Hello everyone, today XM Forex will bring you "[XM Forex]: The Federal Reserve's "Civil War" escalates! Is the December rate cut on hold?". Hope this helps you! The original content is as follows:
The U.S. Federal Reserve System (Fed) is engaged in an unprecedented internal dispute. This disagreement is so intense that it has been almost invisible during the nearly eight years of the current chairman Jerome Powell's tenure. The plan to cut interest rates, which originally seemed logical two months ago, has now become confusing due to the tit-for-tat confrontation between hawkish and dovish officials. Although investors are still betting on a slightly higher chance of a rate cut in December, market confidence is already on thin ice.
Source of disagreement: Confrontation between hawks and doves, swinging centrists
Federal Reserve officials’ perceptions of economic threats are severely divided.
The dove camp is worried about the near stagnant employment growth and is worried that high interest rates will continue to drag down the labor market; the hawks are closely watching the signs of inflation, warning that consumer spending is still resilient, and xmxyly.companies may take the opportunity to pass on the cost of tariffs, further pushing up prices.
The centrist position is increasingly blurred, making it difficult to form an overwhelming consensus. Even if official data is released again, it may not be able to quickly heal this rift.
To make matters worse, the U.S. government shutdown has disrupted key employment and inflation reports, forcing officials to rely instead on private surveys or anecdotal reports. This is tantamount to everyone talking in a data vacuum and further amplifying factional opposition.
The pace of interest rate cuts has changed: from "three consecutive cuts" to "hawks collectively rebelling"
Looking back at the September policy meeting, 10 of the 19 Fed officials initially expected to cut interest rates in October and December. This is exactly the same as Powell's rate cuts last year and 2019. If successful, it would mark three consecutive meetings of 25 basis points each.
However, at the end of October, the Federal Reserve cut interest rates again to a range of 3.75%-4%Later, the attitude of the hawks took a sharp turn. Public xmxyly.comments and the latest interviews show that they scoff at the idea of a third interest rate cut and believe that further easing is unnecessary.
Powell rarely bluntly refuted market expectations for an interest rate cut at the press conference that day, precisely to appease this seemingly irreconcilable policy xmxyly.committee.
The government shutdown "added fuel to the fire": the data vacuum amplified the voices of factions
The government shutdown added fuel to the fire, and the employment and inflation reports that could have reconciled the differences came to an abrupt end. Although doves are worried about weak employment, they suffer from a lack of fresh and strong evidence; hawks are taking advantage of the situation to advocate suspending interest rate cuts, emphasizing that consumer spending is solid and xmxyly.companies may pass on the cost of tariffs. The two factions, the eagle and the dove, are gaining momentum, while the centrists are becoming increasingly marginalized.
Some officials even believe that the December and January meetings are functionally interchangeable, and the end-of-year interest rate cut seems a bit deliberate. Another possibility is to reluctantly cut interest rates in December and at the same time send a signal that the threshold for future interest rate cuts will be significantly raised.
Economic weirdness: Mild stagflation is xmxyly.coming, and Trump’s policies are the driving force behind it
The U.S. economy is currently trapped in a strange xmxyly.combination: inflation is facing upward pressure, but employment growth is almost stagnant. This is what the economists call a precursor to "stagflation."
Diane Swank, chief economist at KPMG, pointed out, "It is one thing to predict mild stagflation, and another to experience it personally."
Many economists point the finger at the Trump administration's radical reforms in the areas of trade and immigration. The last official data before the shutdown revealed that the key inflation indicator reached 2.9% in August, which was not only higher than the Fed's 2% target, but also rebounded from 2.6% in the spring. Although it was lower than the worst forecast after Trump's earlier tariff increase, it was enough to set off alarm bells for hawks.
Three major points of controversy: tariffs, employment, and interest rate neutrality, which determine the future path
Federal Reserve officials are tit-for-tat on three key issues, each of which will profoundly affect the direction of subsequent policy.
First of all, is the price increase caused by tariffs a one-time shock or a continuing threat? Hawks worry that xmxyly.companies will pass on costs next year after absorbing the initial costs; doves counter that xmxyly.companies have been unwilling to increase prices too much, which just proves that demand is weak and it is difficult to support inflation.
Secondly, monthly employment growth plummeted from 168,000 in 2024 to an average of only 29,000 in the three months before August. Is this a shrinking demand for corporate employment, or is it a shrinking labor supply caused by reduced immigration? If it is the former, high interest rates may trigger a recession; if it is the latter, interest rate cuts may over-stimulate demand.
Third, are current interest rates still restrictive? Hawks believe that after a total of 50 basis points of interest rate cuts this year, interest rates are close to neutral levels, and the risks of further easing outweigh the benefits; doves insist that there is still room to suppress interest rates and can support employment without reigniting inflation. Powell hit the nail on the head: “The risk tolerance of each party is inherently different, which naturally leads to different views.”
Powell “Committee Management": From the Jackson Hole speech to the press conference "firing"
For months, Powell has tried to heal the rift. In his Jackson Hole speech in August, he advocated that the impact of tariffs was temporary and that weak employment was due to insufficient demand, and his stance was biased towards the dovish side. Subsequent data confirmed his judgment. : The number of new jobs in the economy is almost zero. However, this statement exceeded the bottom line of some hawks. At the October 29th meeting, Kansas City Fed President Jeff Schmid voted against, Cleveland Fed President Beth Hammack, Dallas Fed President Lori Logan and other non-voting banks. At the press conference, Powell changed his tone and took the initiative to clarify that the December interest rate cut was "far from an established fact." I know the art of "committee management" well, and as early as July 2019, I reminded my colleagues that the worst time to adjust market expectations is at the press conference. Now, he personally came out to convey the concerns of the hawks: "More and more xmxyly.committee members now believe that action should at least be suspended until the next meeting. ”
Representative of the Doves: From Goolsby to the Troika appointed by Trump
Chicago Fed President Austan Goolsby’s change of stance is the most representative. In September, he expected to cut interest rates only once more this year, somewhere between a dove and a hawk; now he warns that the “temporary” inflation that has lasted for three years will not be disclosed. The consensus is that it is temporary, alluding to the lessons learned in the 1970s and 2021-22. September’s inflation data is more xmxyly.complicated: the overall mildness is due to the slowdown in housing costs, but the core indicator rose to 3.6% annually in March, and non-housing service prices were also firm. Goolsby lamented: “The last information before the data interruption showed that inflation is moving in the wrong direction. ”
The most eye-catching figures in the dove camp are the three officials appointed by Trump. White House adviser and governor Stephen Milan advocated a 50 basis point interest rate cut at the September meeting; Michelle Bowman and Christopher Waller are also popular candidates for the next chairman. The doves firmly believe that the current situation and 2021-22 cannot be achieved On the same day, there are concerns that the Federal Reserve will be slow to respond to the slowdown in employment. San Francisco Fed President Mary Daly issued a statement on Monday to support: The slowdown in wage growth proves that there is a demand rather than a supply problem. If we are too careful about 1970s-style inflation, we may miss the productivity dividend of the 1990s, and the economy may lose employment and growth during the adjustment.
Conclusion: It is difficult to resolve differences even after the data xmxyly.comes back, and the December meeting will become a crucial battle
Even if the data blackout period ends, the latest report to be released may not easily resolve the differences. In the final analysis, these disputes are about the weighing of distant risks: How much attention should be paid to threats that will only emerge months later? The outcome of the Japanese meeting is unpredictable. Whether or not to cut interest rates and what the guidance will be will determine whether the Fed can find a balance under the shadow of stagflation. Investors are waiting with bated breath. Whether Powell's "civil war" mediation technique will be effective is related to the direction of the global market.
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