"Fed Whisperer": Powell's press conference was "unusually hawkish," highlighting "internal discord" within the Federal Reserve; a December rate cut is "far from certain."

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The Federal Reserve cut rates as expected, but the hawkish signals sent by Powell at the post-meeting press conference poured cold water on the market's widespread expectation for another rate cut before the end of the year.

Nick Timiraos, a Wall Street Journal reporter known as the “new Fed reporter,” said in a recent article that Powell’s rare tough statements not only highlight the growing divisions within the FOMC, but also indicate that, against the backdrop of “flying blind” on economic data, the path of future monetary policy is highly uncertain.

On Wednesday local time, the Federal Reserve announced a 25 basis point cut in the benchmark interest rate, lowering the target range for the federal funds rate to 3.75% to 4%, the lowest in three years. This marked the second consecutive meeting with a rate cut. However, the focus of the press conference quickly shifted to Powell’s views on future policy. He explicitly refuted the market’s belief that a December rate cut was a “done deal,” stating that the prospect is “far from certain.”

Powell’s comments had an immediate effect, reversing market optimism. The probability of a December rate cut plunged from 95% to 65%. The Dow Jones Industrial Average and S&P 500 erased intraday gains, with the Dow ultimately closing down 0.2% and the S&P 500 marginally lower. The 2-year U.S. Treasury yield, which is most sensitive to interest rate prospects, surged 0.092 percentage points to 3.585%, marking the largest one-day increase since early July.

Timiraos analyzed that Powell’s speech made it clear that as “more and more officials,” in his words, question the necessity of further rate cuts, the easiest part of this easing cycle may be over. At the same time, as each rate cut progresses, the question of when to stop cutting rates becomes increasingly pressing.

Internal Divisions Emerge, Decision Vote “Split Three Ways”

The latest rate decision passed by a vote of 10 in favor, 2 against, with the voting details exposing severe divisions within the committee. Kansas City Federal Reserve President Jeffrey Schmid cast a dissenting vote, favoring keeping rates unchanged; while Fed Governor Stephen Miran held a different view, advocating a larger 50 basis point rate cut.

This “three-way split” in voting confirmed Powell’s remarks that there are “strongly differing views” within the committee. At the press conference, Powell admitted that there is a “growing chorus” among decision makers who are skeptical about the need for further policy easing.

Although in the economic forecast in September, a slight majority of officials expected two more rate cuts this year, leading the market to think a December rate cut was likely. However, even then, a significant number of officials believed there should be no further action after the September cut. These officials were more concerned about inflation—which has remained above the Fed's 2% target for years, and this year stopped its downward trend, partly because higher tariffs imposed by Trump pushed up goods prices.

Powell’s tough stance surprised a market that had been highly anticipating a December rate cut, and analysts are now divided on the path forward.

Vincent Reinhart, chief economist at BNY Mellon Investment Management and former senior advisor to the Fed, believes that given the data vacuum: “Data must prove that further easing is unreasonable, which is a high bar,” so he added, “It’s really hard for them (the Fed) not to cut rates in December. Continuing is easier than stopping.”

However, James Bullard, dean of Purdue University’s business school and former St. Louis Fed president, believes the prospect of a December cut is “more nuanced than the market currently thinks.” He pointed out that strong consumer spending and economic growth, along with recent inflation setbacks, could be reasons to slow the pace of rate cuts. “You’re putting too much bet on a slowdown in the nonfarm payroll report,” Bullard said. He also questioned whether policymakers were truly adapting to the “new normal” where 50,000 new jobs a month is “completely acceptable.”

Government Shutdown Leads to Data “Flying Blind”, Increasing Difficulty of Rate Cuts

What makes decision-making even more difficult is the economic data vacuum caused by the government shutdown. Powell pointed out that if the lack of data leads officials to face “very high uncertainty” about the economic outlook, this itself could be a reason to “support acting cautiously.”

Normally, economic reports between meetings help bridge the differences among officials. But now, especially with key labor market indicators missing, they lack the information needed to resolve disagreements.

Timiraos’ article quoted William English, a professor at Yale School of Management and former senior Fed advisor, as saying that the absence of data means “they haven’t learned much since September, which makes their stance likely similar to what it was in September, but the range of uncertainty around it is much wider.”

In this regard, as previously noted by Wallstreetcn, Bank of America has envisaged several possible scenarios:

Scenario 1: If the government reopens before the end of November, the market will see an “outdated” September employment report before the December meeting. A weak report could lower the risk of hawkish opposition, but even if the data is strong, its “outdated” nature may make it hard to convince Powell to pause rate cuts.

Scenario 2: If the government shutdown ends in early November, allowing the Bureau of Labor Statistics to issue both September and October reports before the meeting. In this case, if the unemployment rate remains stable and economic activity is solid, then a “pause” in December rate cuts becomes a real option.

Scenario 3: In the ideal case, if the government quickly reopens and the BLS releases all three reports for September, October, and November before the meeting. Bank of America proposes a “rule of thumb” for decision-making: If the November unemployment rate is less than or equal to 4.3%, the Fed might hold steady; if at or above 4.5%, it could prompt a cut; if the unemployment rate is 4.4%, the decision will be “finely balanced.”

Balancing Act Between Inflation Concerns and Slowing Employment

Timiraos’ article points out that the core of the Fed’s policy debate now is how to strike a balance between controlling inflation and responding to economic slowdown. On the one hand, some officials do not want to cut rates too much to avoid overheating the economy and leading to sustained inflation above target. Recent stock market records, driven by rate cut expectations, have also heightened their concerns about financial stability.

On the other hand, other officials worry that changes in trade policy and the lagged effects of previous rate hikes on rate-sensitive sectors such as housing are hitting low-income consumers and small businesses. In recent weeks, several large U.S. employers have announced plans to cut white-collar jobs.

The job market is at the center of this debate. Although inflation readings remain somewhat stubborn, summer labor reports this year show a sharp slowdown in employment growth, prompting the Fed to return to the rate cut path. Data shows that in the three months through August, average monthly new jobs were about 29,000, well below last year's 82,000 for the same period. Policymakers are trying to clarify whether slower employment growth is due to fewer people entering the U.S. job market or a decline in labor demand.

Timiraos notes that without clear evidence of substantial deterioration in the job market, it is difficult to garner enough support for more than a 25-basis-point rate cut. At the same time, as each rate cut continues, the question of when to stop is becoming increasingly pressing.

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