Fed rate night: divided committees, torn "hawks cut"

The Federal Reserve is expected to announce its third consecutive rate cut on Wednesday, December 10 local time (Thursday, December 11 in the early morning Beijing time), and at the same time, it will issue a warning about the future development. Previously, there was great uncertainty about which direction Federal Reserve policymakers are leaning towards, but now the market has calmed down and is expected to cut interest rates by 25 basis points. If the Federal Reserve does cut interest rates, its key interest rate will be reduced to a range of 3.5% -3.75%.

However, the situation is not simple. The rate-setting FOMC is divided: some members support cutting interest rates to prevent further weakness in the labor market, while others believe that current easing is sufficient and could exacerbate inflation risks.

As a result, "hawkish rate cuts" have become the buzzword at this meeting. In market parlance, this means that the Federal Reserve will cut interest rates, but at the same time send a signal that the next rate cut should not be expected soon.

"The most likely outcome is a hawkish rate cut - that is, they did cut rates, but statements and press conferences would suggest they might not cut rates again for a while," said Bill English, a former Fed monetary affairs director who is now a professor at Yale University. Mr. English expects the Fed's message to be: "They have adjusted and are comfortable with where they are, and as long as things go roughly as expected, they see no need for further action in the short term."

The FOMC's overall position will be reflected in a post-meeting statement and a news conference by Chairperson Jerome Powell. The Wall Street Economic Review predicted that the statement could change its language, recalling statements from a year ago and referring to "the magnitude and timing of further adjustments." Goldman Sachs expects this to reflect "a higher threshold for any further rate cuts."

In addition to interest rate decisions and announcements, investors will also be watching for updates to the "dot plot", which shows Fed officials' expectations for future interest rates, as well as forecasts for gross domestic product, unemployment and inflation, and a possible update to the Fed's asset purchase programme. Market expectations are that the FOMC may shift from stopping the reduction of yields on maturing bonds to repurchasing.

Multi-factor wrestling

In a note on Mr. Powell's approach, David Merriker, economist at Goldman Sachs, noted that his tone was "likely to signal at the press conference that the threshold for a rate cut has been raised and may again highlight the views of those who oppose it".

On dissent: at the October meeting, the final statement was met with two dissenting votes, one from opposite sides of the interest rate debate. Merriker believes that similar situations may occur again this time, and that there will be more "soft dissent" in the "dot plot", which anonymously shows the expectations of 19 participants (including 12 voting members) on future interest rates, reflecting a significant divergence of views.

Mr. Merriker added that while there were "strong arguments" for a third rate cut, there were valid arguments on both sides.

Mr. English said: "This is a difficult meeting, so there could be multiple dissenting votes. Consensus is often difficult, and members have deeply divergent understandings of how the economy works and the impact of policies, and the current economic situation is particularly complex."

Despite the lack of official data due to the government shutdown, the job market has shown signs of weakness: hiring growth has flattened and sporadic data suggest layoffs are accelerating. The Bureau of Labor Statistics reported Tuesday that job openings were essentially flat in October, but hiring fell 218,000 and layoffs rose 73,000.

On the inflation front, the Fed's core PCE price index rose 2.8% year-on-year in September, slightly below Wall Street expectations but still well above the central bank's 2% target.

Inflation concerns persist

Despite US President Donald Trump's insistence that inflation has disappeared, the reality is, at best, stabilizing and possibly persistently exceeding the Federal Reserve's target - in part because of the tariffs he pursued during his tenure.

While Fed officials have mostly said they expect the price boost from tariffs to be temporary, the gap between current inflation and the central bank's target is enough to worry some economists and policymakers.

Loretta Mester, former president of the Cleveland Fed, said on Tuesday: "Inflation has not returned to 2 per cent, so to put downward pressure on inflation they need to maintain a somewhat restrictive policy stance. Inflation is well above target and not entirely tariff-driven." However, Ms Mester still expects the FOMC to approve another rate cut on Wednesday.

Like market participants, Mr. Mester saw John Williams' speech on November 21 as a "reasonably clear" key signal that another rate cut was on the horizon. Markets had previously bet against a rate cut, especially after Mr. Powell made clear at his October press conference that the December move was not a "given".

"I think they're going to go ahead with this rate cut," Mr. Mester said. "But I want them to signal that they think the economy has reached a policy-appropriate stage and will slow the pace of rate cuts. Because I'm more concerned about inflation risk and its stickiness."

In addition to interest rate issues and dot chart updates, the committee may also signal the next steps in its balance sheet management.

The committee said in October that it would pause the process of "quantitative tightening" - that is, no more natural reductions in yields on maturing bonds - and some market participants expect the Fed to announce a resumption of bond purchases, but not at the pace of "quantitative easing", given the continued pressure on the overnight funding market.