Fed's October Meeting: Deepening Divide Over Possible December Rate Cut

Divisions Emerge at Fed Meeting Over Possible December Rate Cut

According to the minutes of the Federal Open Market Committee (FOMC)'s October meeting, released Wednesday, the Federal Reserve is facing growing divisions over whether to cut interest rates at its December meeting. This suggests that an increasing number of officials, potentially forming a slim majority, harbor reservations about a December rate cut.

Meeting Minutes Reveal Divergent Views

The minutes, released three weeks after the meeting, showed that participants expressed divergent views about the appropriate policy decision at the December meeting. At last month's meeting, the Fed cut its benchmark interest rate by 25 basis points, bringing the target range to 3.75%-4%, in a 10-2 vote. However, the minutes revealed that a number of officials – including regional Federal Reserve bank presidents who participated in the discussions but do not have a vote – opposed the cut. Furthermore, some officials who supported the rate cut indicated that they could have also accepted holding rates steady.

A Rare Split in the Committee

These minutes reveal a rare split within the committee regarding the next step. The minutes noted that "many" officials believed there was insufficient justification for a rate cut in December, a number that exceeded the "number" of officials who saw a cut as "likely to be warranted." However, the minutes also indicate that a majority of officials believe that further rate cuts would be necessary after the December meeting.

Impact of Delayed Economic Data

The recent government shutdown exacerbated this division, delaying the release of employment and inflation reports that were supposed to help settle disputes over short-term interest rate decisions. Richmond Federal Reserve President Thomas Barkin stated in an interview on Tuesday: "It's hard to build consensus when you don't have compelling data."

Market Expectations Shift

Investors, who previously considered a rate cut at the December 9-10 meeting to be a foregone conclusion, now see the matter as uncertain. Following the Labor Department's announcement on Wednesday that the release of October's jobs data would be delayed, the market-implied probability of a rate cut fell to around 33%. Investors seem to believe that in the absence of new data showing signs of economic weakness, officials will be less willing to support a rate cut in December.

A Difficult Task Awaits Powell

Federal Reserve Chairman Jerome Powell faces a near-impossible task: bridging the divide and building consensus. As Krishna Guha, an analyst at Evercore ISI, noted: "It’s just a choice of the lesser evil unless good fortune intervenes and the data miraculously lights the way.”

Despite criticism that the Fed's culture of consensus fosters "groupthink," Governor Waller made it clear that the situation will be different next month: "Brace yourselves, you may see the least amount of 'non-groupthink' by the FOMC in a long time."

Focus on the Labor Market

Labor market conditions are at the heart of these disagreements. Currently, companies are neither hiring in large numbers nor conducting widespread layoffs. Some policymakers fear that weak economic demand will lead companies to reduce their workforce. Waller noted on Monday that more companies are "starting to discuss layoffs." The other group of officials believes that the economy will continue to grow moderately and fears that the inflation rate, which has exceeded the Fed's 2% target for four consecutive years, may continue for another two years due to tariff-related price increases. These officials warn that companies may become more emboldened by their success in passing on costs after the pandemic, keeping the inflation rate steady at the current level of just below 3%, making it difficult to reduce to the 2% policy target.