Wall Street expects Powell to implement a "hawkish rate cut" this week, and the Federal Reserve is facing its biggest internal division in recent year...
TL;DR
The Federal Reserve is expected to cut rates this week, but Chairman Powell faces a deeply divided committee. He may attempt a 'hawkish rate cut' by balancing the cut with a cautious stance on future easing, though data dependence and internal disagreements complicate this approach.
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On December 8th, while another Federal Reserve rate cut is almost a certainty, the main question remains how Powell will articulate the prospect of further easing next month . With Fed policymakers increasingly divided on their hawkish and dovish stances, Powell will have to undertake a difficult reconciliation at this week's central bank meeting. Wall Street expects this to be a "hawkish rate cut," meaning that after joining the dovish camp in cutting rates this month, Powell may avoid signaling a rate cut in January to appease the hawks within the Fed.
"Powell is facing one of the most divided committees in recent years," Bank of America analysts said in a report last Friday. "Therefore, we believe he will try to balance the expected rate cuts with a hawkish stance at the press conference, as he did in October." However, the Fed chairman has consistently maintained that policymakers do not have a predetermined path, and interest rate changes will depend on subsequent data releases. Therefore, Bank of America is skeptical that Powell can so easily achieve a "hawkish rate cut," given the large amount of market-influencing data to be released between the two meetings, some of which was delayed due to the government shutdown.
Similarly, Michael Feroli, chief U.S. economist at JPMorgan Chase, said he expects Powell to emphasize that interest rates will be close to neutral after this week's rate cut. Therefore, any additional easing will depend on a substantial deterioration in the labor market, rather than on risk management. (Jinshi)