Powell’s allies make a major statement: Is a December rate cut “reversal” now highly likely?

Original Title: "Powell's Allies Set the Tone! Is a Fed Rate Cut in December Now a High Probability Event?"

Source: Golden Ten Data

Over the past month, Federal Reserve officials have publicly erupted in sharp disagreement over the possible direction of the economy and the appropriate level of interest rates. These public debates have left economists and market participants widely questioning whether there is enough support within the Fed to cut rates again at the upcoming policy meeting on December 10.

However, in the past few days, there has been a dramatic shift in market sentiment—investors and economists now generally believe that the Fed is highly likely to take action to cut rates in December.

What is the core driver behind this shift? Economists point out that, given ongoing concerns about the health of the job market, Fed officials are leaning toward another rate cut.

Tom Porcelli, Chief Economist at Wells Fargo, said in an interview: "The deterioration we are seeing in the labor market, I think, is sufficient to provide a reasonable basis for a Fed rate cut 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" stability may be at a tipping point of deterioration.

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

The more critical turning point comes from statements by key officials. Josh Hirt, Senior Economist at Vanguard, revealed in an interview that he personally believes the Fed will cut rates, with the key basis being last Friday's public remarks by New York Fed President Williams—a close ally of Fed Chair Powell. Williams explicitly advocated for a rate cut and said, "I still see 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% a day earlier to over 70%. Hirt said bluntly: "I think the market's interpretation of this is accurate."

He further added that Williams' stance means the three most influential Fed officials—Powell, Williams, and Fed Governor Waller—all support a new round of easing. "We believe this is a very weighty camp, and it's hard to shake."

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

Fed Leadership Signals "Precisely Delivered"

Fed communications—especially those from the highest levels—are rarely accidental.

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

This is precisely why last Friday's speech by current New York Fed President Williams was so significant for the markets. By virtue of his position, he is one of the Fed leadership "Big Three," alongside Chair Powell and Vice Chair Jefferson.

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

Krishna Guha, Head of Global Policy and Central Bank Strategy at Evercore ISI, analyzed in a client report: "'In the near term' is somewhat ambiguous, but the most direct interpretation is the next meeting."

"Although Williams may just be expressing a personal view, signals on key current policy issues from a member of the Fed leadership 'Big Three' are almost always approved by the Chair; without Powell's sign-off, sending such a signal would be a professional misstep," he added.

Core of Internal Disagreement: Three Major Irreconcilable Controversies

Despite the warming consensus for a rate cut, economists still expect that one or more Fed officials advocating for stable rates will cast dissenting votes at the meeting.

Other officials have not been as supportive of a rate cut as Williams. Boston Fed President Collins and Dallas Fed President Logan have both expressed hesitation about further rate cuts. Collins stated bluntly in a CNBC interview that she is concerned about inflation; Logan was even more hawkish, saying she is not even sure she would have voted for the previous two rate cuts. It is worth noting that Collins has voting rights at the FOMC this year, while Logan's voting rights will take effect in 2026.

Harris said that, stepping back, the Fed is facing an "impossible challenge": the current economy is showing stagflation characteristics—high inflation coexisting with high unemployment—and there is no clear Fed policy response to this situation, leading to deep divisions within the rate-setting committee. "There are some very fundamental disagreements."

The first point of disagreement is whether current Fed policy is tight or loose. Officials worried about inflation believe that monetary policy works through capital markets, and with capital markets currently strong, policy may already be in an easing state; officials supporting a rate cut counter that financial conditions in key sectors such as housing remain tight.

The second point of disagreement revolves around the interpretation of inflation. Rate-cutting officials like Williams say that if the temporary effects of tariffs are excluded, inflation would be lower; but officials concerned about inflation have found signs of rising inflation in sectors unaffected by tariffs.

In addition, all Fed officials are puzzled by a contradictory phenomenon: why does a weak job market coexist with strong consumer spending?

Harris said: "This will be a fascinating vote." He added that the final decision may be made on the spot at the meeting.

Special Background: Data Vacuum and Considerations of "Insurance Rate Cut"

Former Cleveland Fed President Mester analyzed that Powell may use the December 10 press conference to deliver a key message: this rate cut is an "insurance rate cut," after which the Fed will observe the economy's reaction.

It is worth noting that, due to the record-length government shutdown, the Fed will not have access to the latest government employment and inflation data at this meeting, meaning the decision will be made in a certain "data vacuum."

Vanguard's Hirt also pointed out that the speeches of Fed officials opposing a December rate cut have sent an important signal to the market: the Fed is not "cutting rates for the sake of cutting rates," thereby preventing the bond market from pricing in higher inflation expectations. "This limits the potential negative consequences of a rate cut when inflation is high and the labor market is not clearly in distress."