Fed Reserve Divided on Rate Cut Amid Job Data Dispute

"The high inflation rate is a matter of concern," (Michael Bar, Federal Reserve Governor). "In my opinion, a 0.5 percentage p...

"The high inflation rate is a matter of concern," (Michael Bar, Federal Reserve Governor). "In my opinion, a 0.5 percentage point reduction in the benchmark interest rate in December is suitable, and a minimum cut of 0.25 percentage points should be implemented," (Stephen Miran, Federal Reserve Governor).

The U.S. government shutdown, which postponed the September employment data, was released on the 20th, adding complexity to the Federal Reserve's benchmark interest rate decision during the December meeting, which was already challenging to forecast. This is because the employment data could be seen as justification for either a rate reduction or a hold, as Federal Open Market Committee (FOMC) members are increasingly divided between those supporting and opposing Trump. Due to the shutdown, the October employment data was not collected, making the September report the most recent available before the rate decision. The Fed makes its rate decisions based on its dual goal of maintaining price stability and achieving maximum employment. The White House, under U.S. President Donald Trump, has been consistently advocating for rate cuts. The Fed's final rate-setting meeting of the year will take place on the 9th and 10th of next month.

As per the employment report published by the U.S. Bureau of Labor Statistics on the 20th, non-farm payrolls in September rose by 119,000, exceeding the market forecast of 50,000. Nevertheless, the unemployment rate slightly increased to 4.4%, up from 4.3% in August. Moreover, the August employment figures were revised, changing from an initially reported rise of 22,000 to a decline of 4,000. This data appears to be neutral regarding employment trends. Following the release of the report, the Chicago Mercantile Exchange's FedWatch Tool indicated a 61% likelihood of a rate hold, down from 67% the prior day, although still greater than the 33% chance of a rate reduction.

Market specialists are carefully examining the statements and makeup of FOMC participants to forecast the decision on interest rates in December. Among the 12 FOMC members who have voting rights, excluding Jerome Powell, six are Federal Reserve Governors (the remaining ones are regional Federal Reserve Bank presidents). They can be split into the "Trump group," which advocates for lowering rates, and the "Powell group," which prioritizes the Fed's autonomy. The Trump group consists of Michelle Bowman, Christopher Waller, and Stephen Miran. The Powell group includes Philip Jefferson, Michael Bar, and Lisa Cook. These factions have recently displayed differences in their evaluations of the benchmark rate and the U.S. economy.

The group led by Powell typically supports maintaining interest rates. On the 20th, Bar mentioned, “It is worrying that inflation is still at approximately 3%, exceeding our goal of 2%,” indicating the necessity of keeping rates unchanged to tackle inflation. Jefferson also commented during a speech by the Kansas City Fed on the 17th, “Although there are potential risks of a slowdown in employment, concerns about inflation have increased. The changing balance of risks highlights the importance of being cautious with rate reductions.” Bar and Jefferson both hold the position of vice chairs at the Federal Reserve.

The Trump group expresses disagreement. Miran, frequently referred to as Trump’s "economic advisor," mentioned during a CNBC interview on the 10th, "I think a 0.5 percentage point reduction in the benchmark rate at the December meeting is suitable, and at least a 0.25 percentage point cut should occur." Waller, speaking at an event in London on the 17th, noted, "Inflation is approaching the Fed's target, and there are signs of a slowing labor market. I back an extra 0.25 percentage point cut in December." Bloomberg reported on the 21st, "The Fed's disagreements are becoming more significant."

Amid statements from Scott Bessent, the U.S. Treasury Secretary, who recently mentioned, “The successor to Powell is expected to be decided before Christmas,” focus is also on the next Federal Reserve chair. Trump has clearly expressed his intent to appoint a chair that aligns with his views. The list of potential candidates is narrowing down to current Fed officials (Bowman, Waller), pro-Trump economic experts (Kevin Warsh, former Fed Governor, and Kevin Hassett, chairman of the National Economic Council), and figures from the financial market (Rick Rieder, Chief Investment Officer at BlackRock). Bessent was also considered but officially turned it down. On the betting platform PredictIt, Hassett has the highest chance of being nominated at 47%. Cho Yong-gu, an analyst at Shinyoung Securities, noted, “Hassett is a key Trump supporter, critical of the Fed, in favor of monetary easing, and economically conservative.” The Fed chair is nominated by the president and confirmed by the Senate. The position carries a four-year term, which can be renewed.