Powell Ally's Strong Signal: Is a Fed Rate Cut in December Now a High Probability Event?

Original Article Title: "Powell Ally Makes Major Statement! Is a December Fed Rate Cut Again a High Probability Event?"

Original Source: FXStreet

Over the past month, Federal Reserve officials have openly displayed sharp disagreements on the potential path of the economy and the appropriate interest rate level. These public debates have led economists and market participants to widely question 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 widely believe that the Fed is highly likely to take rate-cutting action in December.

What is the key driver of this shift? Economists point out that, given the continued concerns about the health of the labor market, Fed officials are leaning towards another rate cut.

Tom Porcelli, Chief U.S. Economist at RBC Capital Markets, said in an interview: "The deteriorating trend we are seeing in the labor market, I think, is a reasonable basis for the Fed to cut rates in December."

The first official data released after the government shutdown ended showed that the unemployment rate climbed to 4.4% in September, reaching the highest level in nearly four years. There are also signs that the stable trend of "low hiring, low firing" in the labor market 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 labor market is still "in a precarious state."

A more crucial turning point comes from the remarks of key officials. Josh Hirt, Senior Economist at Vanguard, revealed in an interview that he personally believes the Fed will cut rates, and the key basis for this is last Friday's public comments by New York Fed President Williams — as a close ally of Fed Chair Powell, Williams clearly 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 soaring 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's 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 heavyweight 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 weakness, forcing the Federal Reserve to take action.

The "Precise 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 influential New York Fed President, are carefully calibrated: they aim to convey a clear policy direction while avoiding triggering excessive market reactions.

This is also why last Friday's speech by the current New York Fed President Williams was significant to the market. In his position, he is one of the members of the Fed's leadership "Big Three," the other two being 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, Global Policy and Central Bank Strategy Head at Evercore ISI, analyzed in a client report: "The phrase 'in the near term' is somewhat ambiguous, but the most direct interpretation is the next meeting."

"Although Williams may be expressing his personal views, signals from the 'Big Three' of the Fed leadership on key current policy issues are almost always approved by the Chair; without Powell's sign-off, sending such a signal would be professionally inappropriate," he added.

Core Internal Disagreements: Three Major Unresolved Controversies

Despite the warming consensus on rate cuts, economists still expect that one or more Fed officials advocating for maintaining stable rates will cast dissenting votes at the meeting.

Other officials have not been as actively supportive of rate cuts as Williams. Boston Fed President Collins and Dallas Fed President Logan have expressed hesitation about further rate cuts. Collins openly voiced concerns about inflation in an interview with CNBC; Logan, on the other hand, is more hawkish, stating that she is not even sure if she would vote to support the previous two rate cuts. It is worth noting that Collins has voting rights in the FOMC this year, while Logan's voting rights will take effect in 2026.

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

The first point of contention is whether the current Fed policy is considered tight or loose. Officials concerned about inflation see monetary policy working through the capital markets, and with the current strong performance of the capital markets, this implies that policy may already be in a loose state; officials in favor of a rate cut rebut this by pointing out that the financial conditions in key sectors such as housing are still tight.

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

In addition, all Fed officials are puzzled by a contradictory phenomenon: the sluggish job market coexists with strong consumer spending.

Harris said, "This will be an intriguing vote." He added that the final decision may be made on-site during 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 wait and see how the economy reacts.

Of note, due to the record-length government shutdown, the Fed will not have access to the latest government employment and inflation data for this meeting, meaning the decision will be made to some extent in a "data void."

Hert of Vanguard Group also pointed out that the speeches of Fed officials who oppose the December rate cut 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 in bond market pricing. "This limits the potential negative consequences of a rate cut in a scenario where inflation is high, and the labor market is not obviously in trouble."

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