Read This Article to Understand the Federal Reserve’s “Internal Dynamics”: How Much Will Rates Be Cut Before Year-End? The Key Lies with Powell and Waller

Read This Article to Understand the Federal Reserve’s “Internal Dynamics”: How Much Will Rates Be Cut Before Year-End? The Key Lies with Powell and Waller

There are internal disagreements within the Federal Reserve over the future path of interest rate cuts, and the final decision will mainly depend on Fed Chairman Powell and Governor Waller.

According to Chase the Trend Trading Desk, on October 17, BofA Securities released a report pointing out that in the current context of data shortages due to the US government shutdown, the stances of Powell and Waller will have a decisive impact on policy direction.

As the Fed Chairman, Powell not only holds voting rights in the Federal Open Market Committee (FOMC), but also leads policy discussions and dominates external communication. His views often sway the overall policy tone.

Waller is unique in that he has publicly admitted to "interviewing" for the Fed Chair position, making his remarks a leading indicator. More importantly, Waller is considered one of the most influential doves within the Fed, and a shift in his stance could signal an overall policy turn.

Although both currently lean toward cutting rates by 25 basis points each in October and December, if inflation and employment data remain strong, the Fed may choose to "stand pat" in December, which is a core risk the market needs to be wary of.

Powell's Stance: Favors Cuts But Highly Data-Dependent

This week, Powell reiterated his dovish pivot. He noted:

Since the September meeting, there hasn't been much change in the employment and inflation outlook.

Although Powell acknowledged the release of strong GDP and spending data after the September meeting, he did not place much weight on it. Instead, he emphasized downside risks in the labor market, believing that a further decline in job openings could raise the unemployment rate.

BofA's report analyzes that Powell personally most likely wants to cut rates once in October and once in December.

However, the report also points out that if the US economy does not meet the conditions for a rate cut at that time—such as a stable job market and sticky inflation—he will change his mind and tend toward pausing cuts in December.

Waller's Stance: Dovish But Starting to Shift

Fed Governor Waller remains one of the more dovish members of the FOMC.

This week, he also stated that there has not been much change in the outlook since the September meeting. Waller is focused on weak labor data, is skeptical about the degree of slowing in labor supply, and downplays inflation risks from loose financial conditions or tariffs.

However, his recent statements have shown subtle changes. Waller said after the October meeting (where he hopes for a rate cut), he will "observe how the strong GDP data aligns with the weak labor market." He also admitted that core inflation excluding tariffs is about 2.5%.

In BofA's view, Waller's base case is still for a 25 bp cut at the next two meetings, with possibly more cuts next year. But Waller's acknowledgment of strong GDP shows he may be open to pausing rate cuts, whereas previously he strongly favored lowering rates to the neutral level of 2%.

Dovish Board vs Hawkish Regional Feds

The current makeup of the FOMC presents a clear internal split. The Board led by Powell is generally more dovish, while voting regional Fed presidents are generally more hawkish.

Within the Board, doves dominate but there are dissenting voices:Vice Chair Jefferson: Slightly less dovish than Powell, worries about sticky core services inflation.Governor Barr: Showing "hawkish surprise," is concerned about inflation staying high for too long, and may only support one cut this year.Governor Bowman: View aligns closely with Waller, clearly hopes for two more 25 bp cuts this year.Governor Miran: Clearly a "super dove," believes there should be a total of 150 bp in cuts this year, which is the "lowest" in the dot plot.

Voting regional Fed presidents are noticeably more hawkish:Williams (New York Fed): More dovish than expected, supports more cuts this year.Goolsbee (Chicago Fed): Recently more hawkish, concerned about potential inflation.Schmid (Kansas City Fed): Explicitly said another cut may not be needed in 2025.Musalem (St. Louis Fed): Worried about overly loose policy, may only support one cut this year.

This standoff between a dovish Board and hawkish regional Feds increases the risk of dissenting votes during the rate cuts in October and December.

BofA Securities Predicts Rate Cut in October, Stand Pat in December

Despite the variety of Fed officials' statements, the ultimate decision power remains with economic data.

BofA analysis believes that the Fed will cut rates by 25 bp in October but pause in December, provided the job data remains stable and inflation stays sticky.

If the government shutdown causes significant delays in data releases, or if unemployment spikes in upcoming data, a cut may happen again in December.

BofA Securities expects the September core CPI month-over-month rise to be 0.3%, and year-over-year to be 3.1%. Such data may not be enough to alter the Fed's set path.

In addition, due to escalating trade friction, the S&P Global US manufacturing PMI for October is expected to fall from 52.0 to 51.0.

In summary, investors should not take two rate cuts before year-end for granted. Powell's data dependency and Waller's subtle shift plant uncertainty for December's policy path. Inflation and employment reports over the next few weeks will be key in deciding whether the Fed "follows through to the end" or "stops cautiously."

~~~~~~~~~~~~~~~~~~~~~~~~

The above content comes from Chase the Trend Trading Desk.

For more in-depth analysis, including real-time interpretation and frontline research, please join Chase the Trend Trading Desk Annual Membership

Risk Warning and DisclaimerMarkets involve risk, and investments need to be made cautiously. This article does not constitute individual investment advice, nor does it take into account the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing accordingly is at your own risk.