Allies of Federal Reserve Chair Jerome Powell have laid the groundwork for him to push a rate cut through a divided committee at December’s meeting even though it could draw multiple dissents
The air inside the Eccles Building is thick with anticipation and, frankly, a palpable tension. As the Federal Reserve's crucial December meeting looms, whispers from within indicate that allies of Chair Jerome Powell have been strategically preparing the battlefield for a potential rate cut. This move, if it materializes, would be a bold — some might say audacious — maneuver through a deeply divided Federal Open Market Committee (FOMC), nearly guaranteeing a chorus of dissents.
Indeed, the stage is set for a high-stakes decision, forcing the central bank to choose between two unenviable paths. On one side, the perceived need to ease monetary policy before the economy slows too much. On the other, the persistent specter of inflation, coupled with a growing "whiff of stagflation" — that dreaded combination of sluggish growth and sticky prices — making any pivot fraught with peril. What's more, the committee will be wrestling with this choice while still missing critical, up-to-the-minute economic data that could sway the outcome.
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For months, the market has been trying to decipher the Fed's next move, and the signals have been anything but clear. While Chair Powell has maintained a posture of data-dependency, a subtle, yet unmistakable, shift in rhetoric has been observed among influential members of the FOMC. Certain governors and regional Fed presidents, often seen as aligned with Powell's strategic vision, have begun to emphasize the cumulative effect of past rate hikes and the lagged impact of monetary policy. They've highlighted the risks of overtightening and the need to avoid a recession, subtly shifting the narrative from solely battling inflation to balancing growth concerns. This carefully crafted messaging, analysts suggest, is the groundwork: softening expectations for continued hawkishness and preparing the public and the committee for a potential dovish turn.
The committee itself is anything but monolithic. The FOMC comprises a diverse group of economists and policymakers, each with their own models, biases, and interpretations of the data. On one end, the hawks argue that inflation, while moderating, remains well above the Fed's 2% target, and that easing too soon risks reigniting price pressures. They point to still-resilient labor markets and consumer spending, albeit with some signs of softening. For them, credibility hinges on seeing inflation firmly on a downward path before any cuts.
Conversely, the doves, increasingly vocal, contend that the economy is already feeling the pinch of higher interest rates. They stress the slowdown in manufacturing, the cooling housing market, and the rising cost of borrowing for businesses and consumers. For this faction, delaying a cut risks tipping the economy into an unnecessary and painful recession, potentially leading to widespread job losses. They might argue that the decline in goods inflation and the moderation in services inflation, despite some stickiness, are enough to warrant a pre-emptive strike.
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Adding to this internal friction is the inconvenient truth of missing data. The December meeting will take place before a full suite of the latest inflation metrics (like the Personal Consumption Expenditures, or PCE, index for the current month) or comprehensive jobs reports are available. Policymakers will be forced to make a forward-looking decision based on incomplete information, relying heavily on projections and their own economic models – a situation that inherently breeds disagreement.
This data void, coupled with the differing philosophies, magnifies the stakes. Indeed, the description of a "whiff of stagflation" is not hyperbole. Recent economic indicators have painted a concerning picture: GDP growth, while robust in some quarters, shows signs of deceleration, particularly in forward-looking indicators. Meanwhile, certain core inflation measures remain stubbornly elevated, resisting the Fed’s efforts to bring them down decisively. Should the economy enter a period of slowing growth and persistent inflation, the Fed's traditional tools become significantly less effective, and its choices become agonizingly difficult.
A rate cut in December would signal Chair Powell's willingness to prioritize growth concerns over an absolute victory against inflation, betting that the cumulative tightening has already done enough to bring prices down over time. It would be a strong form of "forward guidance," indicating a pivot in policy direction. However, should inflation prove more entrenched than anticipated, or should the economy struggle to find its footing even with lower rates, Powell's legacy and the Fed's hard-won credibility could be severely tested. Conversely, holding steady or even hinting at further hikes risks deepening a slowdown that many now believe is already underway.
The December FOMC meeting won't just be about interest rates; it will be a referendum on Chair Powell's leadership and the future direction of U.S. monetary policy. Expect fireworks, and undoubtedly, more than a few dissenting votes etched into the official minutes. The financial markets and the global economy will be watching every word.
