Powell's statements and his allies' comments resolve doubts: Is the rate cut in December confirmed?

In recent weeks, the market has experienced a dramatic shift in its expectations regarding the Federal Reserve’s action in December. What just days ago seemed uncertain—whether the institution would cut interest rates again—has become a fairly probable bet. This change in perception is not the result of chance but of a set of carefully articulated signals from the higher echelons of the institution.

The catalyst: a strategic message from New York

Last Friday (UTC+8), the President of the Federal Reserve Bank of New York, Williams, shared a statement that ignited the markets. Williams, as a close collaborator of Chairman Powell, publicly hinted that “there is room to make rate adjustments in the short term.” The reaction was immediate: the probability of a rate cut in December jumped from approximately 40% to over 70% within hours.

Josh Hirt, an economist at Vanguard, interpreted these words as confirmation of a consensus at the top: “We believe Powell, Williams, and Governor Waller form a very cohesive block, difficult to question.” This alignment of the three most prominent leaders of the Federal Reserve suggests that advocates of monetary easing have enough political backing.

Why now? The pressures justifying the cut

The weakness of the labor market emerges as the main justification. Data released after the government shutdown revealed that unemployment reached 4.4% in September, its highest level in nearly four years. Simultaneously, economists like Matthew Luzzetti of Deutsche Bank warn that the labor market is in a “fragile situation,” characterized by minimal hiring.

Tom Porcelli of Wells Fargo was direct: “The labor deterioration we observe is enough to justify a rate cut in December.” This criterion seems to be shared by most market participants and the economic establishment.

However, Ethan Harris, former chief economist at BofA, nuances that the economy shows multiple signs of weakness that compel the Federal Reserve to intervene, beyond just the labor factor.

The precision in messages from the top

It is crucial to understand that Powell’s communications and those of his close circle do not happen by chance. Krishna Guha of Evercore ISI explains this logic: “Although Williams might be expressing a personal opinion, the signals issued by the ‘big three’ on critical policy issues almost always contain the tacit approval of the president; issuing such a message without Powell’s acceptance would be irresponsible.”

This means that Williams’ recent insinuation should be interpreted as an implicit endorsement of Powell’s statements about possible monetary easing. The market has correctly captured this.

The internal tensions that remain

Despite this apparent consensus at the top, deep internal divisions exist. Boston President Collins has openly expressed concern about inflation. Dallas President Logan was even more forceful, questioning previous cuts.

Harris identifies the core of these discrepancies: the Federal Reserve faces a dilemma with no apparent way out. The current economy exhibits signs of stagflation—moderate unemployment but inflationary pressures—a combination for which there is no clear political response.

The fundamental differences revolve around whether the current policy is restrictive or expansionary (the anti-inflation camp sees strength in capital markets; those inclined toward cuts point to restrictions in housing), and how to interpret inflation when tariffs create distortions in the data.

The peculiar context: decision under “data vacuum”

An additional factor complicates everything: due to the unprecedented government shutdown, the Federal Reserve will lack the most recent employment and inflation data for the December FOMC meeting. This places the decision in a realm of partial uncertainty.

Mester, former president of Cleveland, suggests that Powell could use the subsequent press conference to characterize this cut as “preventive,” after which the institution will assess how the economy responds.

Hirt adds a strategic consideration: officials opposed to the cut have sent an equally important message: the Federal Reserve does not act “just to act.” This prevents the market from anticipating higher inflation resulting from overly lax policy, thus limiting potential negative consequences of a cut in a context of residual inflationary pressures.

The December vote promises to be, in Harris’s words, “interesting.” The final outcome could be determined at the very moment of the meeting.