The Federal Reserve is expected to cut interest rates consecutively this week, but internal rifts may hinder the path to further easing

According to the Zhitong Finance APP, the Federal Reserve is expected to cut interest rates for the second consecutive time this week to support a weak job market. However, if anyone proposes to continue the easing cycle after October, they may face renewed opposition from some officials who remain concerned about inflation issues.

Although the dovish camp within the Federal Reserve currently holds the upper hand in debates and has successfully pushed for rate cuts, another faction of policymakers is worried that the cuts may be too aggressive.

The latest consumer price data released last Friday showed that the core inflation rate in the U.S. fell to its lowest level in three months in September. While this data supports the Federal Reserve's rate cut plans, the overall cooling process of inflation has stalled, providing no strong basis for the argument of "further multiple rate cuts."

Wells Fargo economist Nicole Serwe said, "This will keep the Federal Reserve leaning towards easing in October, but the fundamentals of inflation have not actually changed."

Since the beginning of this year, Federal Reserve policymakers have been in a wait-and-see mode, assessing the impact of tariffs and other policy changes on the economy. After a significant slowdown in hiring activities this summer, officials decided in September to lower the benchmark interest rate by 25 basis points, while also expecting two more rate cuts before the end of the year.

Since that meeting, the latest employment market data (some of which is provided by private institutions to fill the information gap caused by the government shutdown) has not brought many positive signals. Earlier this month, Federal Reserve Chairman Jerome Powell stated that the job market "has actually weakened significantly" and pointed out that there are "considerable downside risks."

As a result, the futures market has almost fully priced in the expectation of a "25 basis point rate cut next week," while also anticipating another cut in December and a third cut in March next year.

In the $29 trillion U.S. Treasury market, investors have achieved excess returns this year based on expectations of Federal Reserve rate cuts, marking the best annual performance since 2020. This month, the market continued its upward trend due to expectations of further rate cuts, with an increase of 1.1%.

Vishal Khanduja, head of the global fixed income team at Morgan Stanley Investment Management, stated, "It is extremely difficult to break away from the market's pricing expectation of a 50 basis point cut in the next two meetings. Finding a reasonable basis for deviating from market expectations is challenging."

Last Friday's Consumer Price Index (CPI) report did not dispel traders' expectations for rate cuts. The rise in the U.S. Treasury market pushed the yield on the 10-year U.S. Treasury bond (a benchmark for borrowing costs such as credit cards and auto loans) below 4%, approaching levels seen in April of this year.

Stephen Stanley, chief U.S. economist at Santander Bank's U.S. capital markets, pointed out, "The financial markets have taken an extremely aggressive stance, and the Federal Reserve leadership has not provided any clear signals of opposition to this."

However, dissenting voices may come from several regional Federal Reserve Bank presidents, including Alberto Musalem of the St. Louis Fed, Jeff Schmied of the Kansas City Fed, and Beth Harmack of the Cleveland Fed. The interest rate expectations released in September showed that among the 19 policymakers at the Federal Reserve, 9 believed there would be at most one more rate cut this year, with 7 even leaning towards no further cuts

Inflation Pressure Triggered by Non-Tariff Factors

Some officials in this camp acknowledge that hiring activities have slowed and support the interest rate cut measures in September, but they also point out that the significant decline in immigration has sharply reduced both labor supply and demand. This means that to maintain a stable unemployment rate, the number of new jobs required has decreased. Some officials estimate that the so-called "employment balance growth rate" is close to the current employment growth rate—over the past three months, the average monthly new jobs in the United States have been 29,000.

Their concerns about inflation are also gradually intensifying.

Although tariffs have not triggered the significant price increases many expected, the continuous introduction of new tariff measures raises concerns that their impact may be more lasting. Additionally, there is currently evidence that, apart from areas directly affected by tariffs, other categories are also beginning to experience price increase pressures.

Cleveland Fed's Harmack will gain voting rights in the Federal Reserve's rate-setting committee next year, and she has recently expressed concerns about the surge in service prices. In early 2025, core service inflation excluding housing had receded, but currently, its year-on-year growth rate has exceeded 3% for four consecutive months.

Several officials also pointed out that the inflation rate has exceeded the Federal Reserve's 2% target for more than four years and is not expected to reach this target again until 2028. The situation of inflation being persistently above the target increases the risk of a significant rise in long-term inflation expectations—this change will trigger heightened vigilance among policymakers.

Credibility of Federal Reserve's Policies

Philadelphia Fed President Anna Paulsen stated in her first policy speech this month: "The stability of long-term inflation expectations is an important proof of the credibility of monetary policy. It is crucial to complete the task of controlling inflation and bring the inflation rate fully back to 2%."

The current government shutdown has led to interruptions in the release of official data, further complicating the difficulty for Federal Reserve officials in assessing the economic situation. Citigroup economist Veronica Clark stated that this may mean officials will continue to follow the path set in the September rate expectations—namely, two more rate cuts this year and only one more rate cut throughout 2026.

Clark said: "There are still significant divisions within the Federal Reserve, but currently, there is no information that can truly change either side's position. This is likely to become one of the core messages conveyed in the meeting: they currently lack sufficiently clear clues to judge the future direction of the economy."

Even Christopher Waller, a Federal Reserve governor who was among the first to point out the hiring slowdown issue earlier this summer, has recently called for a cautious approach to rate cuts—because he observes a contradiction between strong economic growth and a weak job market.

Waller stated earlier this month in a speech: "The situation will eventually change. Either economic growth will slow down, matching the weak job market; or the job market will recover, aligning with strong economic growth."