Original source: Jin10 Data

In the past month, Federal Reserve officials have publicly erupted into sharp disagreements over the possible direction of the economy and appropriate interest rate levels. These public debates have led economists and market participants to generally question whether there is enough support within the Federal Reserve for another rate cut at the upcoming policy meeting on December 10.

However, in the past few days, market sentiment has dramatically shifted—investors and economists now widely believe that the Federal Reserve is highly likely to take action to cut rates in December.

What is the core driver of this shift? Economists point out that, given ongoing concerns about the health of the labor market, Federal Reserve officials are inclined to cut rates again.

Tom Porcelli, Chief Economist at Wells Fargo, stated in an interview: "The deterioration we see in the labor market, I think, is sufficient to justify a rate cut by the Federal Reserve in December."

The first official data released after the government shutdown showed that the unemployment rate rose to 4.4% in September, the highest level in nearly four years. At the same time, there are signs that the labor market's "low hiring, low firing" stable situation may be at a critical point of deterioration.

Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, bluntly stated in a report to clients that the labor market remains "in a precarious state."

A more critical turning point comes from the statements of core officials. Josh Hirt, Senior Economist at Vanguard, revealed in an interview that he personally believes the Federal Reserve will cut rates, with a key basis being the public remarks made by New York Fed President Williams last Friday—who is a close ally of Fed Chair Powell—who clearly advocated for a rate cut and stated, "I still believe there is room for further adjustments to rates in the near term."

This statement directly ignited the financial markets, with expectations for a December rate cut soaring from nearly 40% the day before to over 70%. Hirt stated: "I think the market's interpretation of this is accurate."

He further added that Williams' position means that the three most influential officials at the Federal Reserve—Powell, Williams, and Fed Governor Waller—are all in favor of a new round of easing. "We believe this is a very weighty camp that is hard to shake."

Ethan Harris, former Chief Economist at BofA Securities, also pointed out that the economy is showing more convincing signs of weakness, forcing the Federal Reserve to take action.

Precise Communication from Federal Reserve Leadership

The communication from the Federal Reserve—especially at the highest levels—is rarely accidental.

Signals from the top, particularly from the Chair, Vice Chair, and the highly influential President of the New York Fed, are carefully weighed: they must convey clear policy ideas while avoiding triggering excessive reactions in the financial markets.

This is precisely why the remarks made by current New York Fed President Williams last Friday were significant for the market. By virtue of his position, he is one of the members of the Federal Reserve's leadership "trio," the other two being Chair Powell and Vice Chair Jefferson.

Therefore, when Williams hinted at "the possibility of further adjustments to rates in the near term," investors interpreted it as a clear signal released from the leadership: the leadership is inclined to cut rates at least once more in the near term, with the most likely timing being the Federal Open Market Committee (FOMC) meeting in December.

Krishna Guha, Global Policy and Central Bank Strategy Head at Evercore ISI, analyzed in a client report: "While the phrase 'in the near term' has some ambiguity, the most direct interpretation is the next meeting."

"Although Williams may just be expressing a personal view, signals issued by a member of the Federal Reserve leadership 'trio' on key current policy issues are almost always approved by the Chair; without Powell's signature consent, it would be a professional misconduct for him to issue such a signal," he added.

Core of Internal Disagreement: Three Major Irreconcilable Controversies

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

Other officials have not actively supported rate cuts like Williams. Boston Fed President Collins and Dallas Fed President Logan have both expressed hesitation about further rate cuts. Collins explicitly voiced concerns about inflation in an interview with CNBC; Logan, being more hawkish, stated that she is even uncertain whether she would vote in favor of the previous two rate cuts. It is worth noting that Collins has voting rights on the FOMC this year, while Logan's voting rights will take effect in 2026.

Harris stated that, looking at the bigger picture, the Federal Reserve is facing an "impossible challenge": the current economy exhibits stagflation characteristics—high inflation coexisting with high unemployment—while there is no clear Federal Reserve policy response to this situation, leading to profound divisions within the rate-setting committee. "There are some very fundamental disagreements."

The first point of disagreement is whether the current Federal Reserve policy is tightening or easing. Officials concerned about inflation believe that monetary policy operates through capital markets, and the current strong performance of capital markets suggests that policy may already be in an easing state; those supporting rate cuts counter that the financial conditions in key sectors like housing remain tight.

The second point of disagreement revolves around the interpretation of inflation. Officials advocating for rate cuts, like Williams, argue that if the temporary effects of tariffs are excluded, inflation levels would be lower; however, officials worried about inflation have found signs of rising inflation in sectors not affected by tariffs.

In addition, all Federal Reserve officials are puzzled by a contradictory phenomenon: why a weak labor market and strong consumer spending can coexist.

Harris stated: "This will be an intriguing vote." He added that the final decision may be finalized on-site at the meeting.

Special Context: Data Vacuum and Considerations for "Insurance Rate Cuts"

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," after which the Federal Reserve will observe the economic response.

It is noteworthy that due to the record length of the government shutdown, the Federal Reserve will not be able to obtain the latest government employment and inflation data at this meeting, which means that decisions will be made to some extent in a "data vacuum."

Hirt from Vanguard also pointed out that the speeches of those Federal Reserve officials opposing a rate cut in December have conveyed an important signal to the market: the Federal Reserve is not "cutting rates for the sake of cutting rates," thus preventing the bond market from pricing in higher inflation expectations. "This limits the negative consequences that rate cuts might bring in a situation of high inflation and a labor market that has not clearly fallen into distress."

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