Powell's December Warning Exposes Hardening Divisions At Fed

Daniel Carter

Summary:

Federal Reserve Chair Jerome Powell's blunt warning that investors need to rein in expectations for a December interest-rate cut underscored a growing tug-of-war among US policymakers who are opposed in their outlooks for jobs and inflation.

While Powell made it clear that the primary concern for some is a cooling job market, others inside the Fed are warning persistent inflation will limit room for more easing. And a freeze on the release of official economic data during the ongoing government shutdown is only hardening the divide.

Powell's comments came after the Federal Open Market Committee voted 10-2 to lower the target range for the federal funds rate by a quarter percentage point, to 3.75%-4%. It was the second straight rate cut, but for the first time in six years, there were dissents in both directions — with one official advocating a larger reduction and another preferring to stay on hold.

In unusually direct remarks, the Fed chair used the opening statement of his post-meeting press conference to hammer home a message that a follow-up move in December is not a done deal.

"A further reduction in the policy rate at the December meeting is not a foregone conclusion — far from it," Powell said. Later, while taking questions from reporters, he added that there was "a growing chorus now of feeling like maybe we this is where we should at least wait a cycle" before taking another step.

Investors got the message loud and clear: Treasuries fell by the most in nearly five months after his remarks, sending the yield on the 10-year note back above 4%.

Futures linked to the Fed's benchmark rate suggest another cut at the Fed's next policy meeting on Dec. 9-10 is now only moderately likely, instead of a virtual lock.

"This was clearly something that we did not expect there would be such a strong pushback against," said Pooja Sriram, an economist at Barclays. "The one thing that we can make out from the press conference is they clearly had a lot of discussion about December."

Fed officials opted for a rate cut at their last meeting in September for the first time this year after a marked slowdown in hiring raised worries about the labor market. But there were signs that several officials were wary of cutting too far. Projections released after that meeting showed 9 of 19 on the FOMC expected no more than one additional reduction this year, including seven who preferred no further moves in 2025.

Wednesday's vote marked the third straight FOMC meeting in which officials lodged dissents against the majority decision, a run not seen since 2019.

The division also comes at a particularly trying time due to the shutdown, which began in early October. In the absence of official government data, economists and policymakers have been scouring private sector and state-level indicators for clues about employment trends.

Companies including Amazon.com Inc., General Motors Co. and Applied Materials Inc. have in recent weeks announced plans to reduce headcount, though layoffs remain limited overall, according to weekly state-level filings for unemployment insurance — a point Powell emphasized Wednesday.

Still, the Fed chair made it clear which side of the jobs-versus-inflation debate he is on. He downplayed concerns about price pressures and said the Fed has a role to play in responding to the slowdown in hiring, even if it's partly on account of President Donald Trump's immigration crackdown.

"Some people argue that that this is supply, and we really can't affect it much with our tools," Powell said. "But others argue, as I do, that there is an effect from demand, and that we should use our tools to support the labor market when we see this happening."

If Powell's caution over December does end up foreshadowing a pause in rate cuts, that would almost certainly inflame tensions with the White House as Trump continues to criticize Powell for not lowering rates fast enough. His broadsides have already fueled worries about the future of the central bank's independence.

Joe Brusuelas, chief economist at RSM US LLP, said he would "expect dissents to be a near-permanent feature of the meetings going forward" as new voters rotate onto the FOMC in 2026 and Trump appoints a replacement for Powell, whose term as chair ends in May.

"There's going to be plentiful diversity around the path on which policy should proceed, given what we're seeing out of the White House, the over-pressure on the Fed to bend policy to its wishes and the substantial disagreements over risk around the outlook linked to inflation," Brusuelas said.

Source: Bloomberg Europe

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