"Powell's allies" continue to voice support for rate cuts, with market expectations for a Fed rate cut in December surging to 80%.

Several of Federal Reserve Chair Powell’s core allies have spoken out intensively in recent days, supporting another rate cut in December, arguing that risks faced by the labor market now outweigh inflation. This series of statements has rapidly fueled market expectations for more easing by the Fed.

The latest statements come from San Francisco Fed President Mary Daly and Fed Governor Christopher Waller. Earlier mentioned by Wallstreetcn, Daly warned on Monday that the labor market faces risks of “nonlinear” deterioration, and Waller publicly supported a rate cut in December. Their views echo the dovish stance of New York Fed President John Williams last week, who emphasized the need to avoid “unnecessary risks” to the job market.

Influenced by this, the market reacted swiftly. Traders in the interest rate swap market currently estimate the probability of a 25 basis-point rate cut by the Fed at its December meeting has surged from about 40% last week to 80%. U.S. Treasury prices rose for the third consecutive session, with yields on the more policy-sensitive two-year note sharply lower over the past two days, and the ten-year note yield falling to its lowest point this month.

The complexity of this decision lies in the delayed release of economic data due to the government shutdown, meaning that when the Fed meets on December 10, it won’t have access to key October and November employment reports. This forces officials to make judgments on incomplete information, increasing the uncertainty of the decision.

Powell’s allies intensively speak out, labor market risks become the focus

Several of the most influential officials within the Fed have shifted the center of policy debate to the labor market.

San Francisco Fed President Mary Daly explicitly stated in a media interview that she supports a rate cut, as managing a sudden deterioration in the job market is more difficult than handling a rebound in inflation. She warned that the labor market has become “very fragile” and faces risks of “nonlinear changes.” Notably, according to "New Fed News" Nick Timiraos, Daly’s public statements rarely deviate from Powell’s position.

Daly’s view echoes the statement of New York Fed President John Williams last week. As the Fed’s “number three," Williams said last Friday that as the labor market cools, downside risks to employment have increased, while upward risks to inflation have eased, thus the Fed still has room for further rate cuts “in the near term.”

Likewise, Fed Governor Christopher Waller also voiced support for a December rate cut on Monday, and suggested taking a more flexible policy approach from 2026.

These officials believe that although inflation remains close to 3%, above the 2% target, cost pressures from tariffs are milder than expected. Williams pointed out there's no evidence of tariffs triggering secondary effects or other price spillovers. Therefore, preventing the labor market from sharply weakening has now become the priority.

Committee divisions highlighted, December decision becomes a “test of judgment”

While dovish voices are growing stronger, divisions within the Fed committee remain significant. Boston Fed President Susan Collins has expressed a more cautious view. She believes that the current “moderately or mildly restrictive” policy stance is still appropriate, as resilient demand may continue to pose upward pressure on inflation. She said she will remain cautious at the next meeting.

Regarding internal differences, Daly said this reflected real-world uncertainty, rather than “group think.” She described next month’s decision as a “test of judgment,” weighing “risks of not acting” against “risks of acting.” She said she personally believes the risks of acting (cutting rates) are lower, and the risks of not acting higher.

When asked whether an early rate cut would restrict future policy space, Daly responded directly that the Fed should not be hamstrung by this. She stressed that whether further rate cuts or hikes are needed in the future, the Fed should retain its options. Against this backdrop, Chair Powell will play a key role in reconciling internal divisions at the December 9–10 meeting.

Market reacts swiftly, bets on rate cuts surge

Driven by dovish statements from Fed officials, the financial market rapidly repriced the policy outlook. According to Bloomberg, overnight indexed swap (OIS) rates relating to the December meeting dropped sharply, with market pricing now reflecting an 80% chance of a 25 bps rate cut.

The U.S. Treasury market responded positively. The benchmark ten-year Treasury yield briefly fell 3 basis points to 4.03%, a new low for the month. Natalliance Securities Vice-Chairman Andrew Brenner wrote in a report that although key jobs data is missing, “investors are comforted by the fact that senior Fed members still hope to ease policy in December.”

In addition to rate cut expectations, some technical factors have also provided support to the bond market. According to Bloomberg, market expectations for this Friday’s monthly index rebalancing will prompt large funds to buy long-duration bonds. Meanwhile, Monday’s $69 billion two-year Treasury auction saw strong demand, with the bid-to-cover ratio the highest in three months.

John Canavan, chief analyst at Oxford Economics, noted, “The improved tone of the front-end of the yield curve over the past few sessions” helped the auction go smoothly. This week will also see $70 billion of five-year and $44 billion of seven-year Treasury auctions.

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