How precarious is the Federal Reserve's rate cut in December? This year's voting committee hesitated to act due to the government shutdown, while next year's voting committee is more concerned about inflation

The divergence among Federal Reserve officials regarding whether to continue cutting interest rates in December is increasingly pronounced. Statements from several Fed officials this Thursday highlighted the differences in their views on rate cuts: one official involved in this year's Federal Open Market Committee (FOMC) decision-making expressed deep concern over data blind spots caused by the government shutdown, while another official who will have voting rights next year believes inflation is the more pressing threat.

Austan Goolsbee, the President of the Chicago Fed who has voting rights in this year's FOMC meetings, stated that the government shutdown has resulted in missing key inflation data, which makes him cautious about further rate cuts. He told CNBC, "Let's be a little cautious and slow down" in the face of unclear data.

Beth Hammack, President of the Cleveland Fed who will have voting rights in next year's FOMC meetings, clearly stated at an event of the Economic Club of New York that inflation is a more urgent concern compared to a weak labor market. She believes the current interest rate setting is "almost non-restrictive" and advocates for monetary policy to continue applying pressure on inflation.

Additionally, John Williams, the President of the New York Fed and one of the "three top officials" of the Fed, stated in Frankfurt that the era of low interest rates is still ongoing, with a neutral interest rate estimated to be around 1%. Michael Barr, a Fed governor who previously served as the Vice Chair for Supervision, emphasized that the Fed must focus on "how to ensure the labor market remains robust." These statements highlight the deep divisions within the Fed regarding the path of interest rate cuts, adding uncertainty to the December policy decision.

Goolsbee: Cautious Action Amid Data Blind Spots

Goolsbee articulated his concerns about further rate cuts on Thursday. Although he had previously advocated for gradual cuts, the data gaps caused by the government shutdown led him to change his stance. He said:

"If there are problems with inflation, it will take us quite a long time to see them, whereas if the labor market starts to deteriorate, we will almost see it immediately. This makes me more uneasy about cutting rates prematurely and assuming that the inflation we have seen over the past three months is just temporary."

Goolsbee specifically pointed out that there are more private sector data sources for the labor market, but inflation data heavily relies on government reports. The U.S. Bureau of Labor Statistics has canceled the release of the Consumer Price Index report for October, which was scheduled for next week, and whether the Commerce Department will release the Fed-favored inflation indicator—the Personal Consumption Expenditures (PCE) price index—depends on when the government shutdown ends.

What makes Goolsbee uneasy is that data from the three months prior to the government shutdown showed that core inflation, excluding food and energy prices, rose by 3.6% year-on-year. The overall inflation rate in September was 3%, still well above the Fed's 2% target. He said, "In the medium term, I am not hawkish on rates. I believe the ultimate endpoint for rates will be much lower than current levels. But when the fog is thick, let's be cautious and slow down."

Goolsbee will have voting rights at the FOMC meeting in December, which will decide whether to continue the rate cuts from the previous two meetings. After that, he will not regain voting rights at the FOMC meetings until 2027

Hamak: Inflation is a more pressing concern than employment

Unlike Goolsbee's cautious stance, Hamak expressed a firmer position. At an event hosted by the Economic Club of New York, she stated that monetary policy should continue to exert pressure on inflation. In her prepared remarks, she said:

"I remain concerned about high inflation and believe that policy should apply pressure to it. For me, comparing the degree of deviation and risk in our dual mandate, inflation is the more urgent concern."

Hamak estimated that inflation would not reach the Federal Reserve's 2% target until one to two years after 2026, which aligns with the median expectation of the 19 policymakers at the Federal Reserve. This means that the Federal Reserve will be unable to achieve its price target for "most of the next decade" and risks embedding high inflation into the economy.

Hamak stated, "This advocates for a moderately restrictive stance on our policy rate to ensure inflation returns to 2% in a timely manner," adding that the current rate setting is "almost non-restrictive."

On October 29, last Wednesday, the Federal Reserve announced its decision to cut rates by 25 basis points for the second consecutive FOMC meeting. Two days later, Hamak indicated that she had preferred to keep rates unchanged at last week's meeting. Hamak was one of three Federal Reserve officials who publicly opposed the rate cut last Friday.

Hamak noted this Thursday that businesses in her district are reporting higher costs and will soon need to pass these price increases on to consumers. She added that, in the context of a prolonged government shutdown and lack of official data, she relies more on such information.

Hamak stated that the labor market is "generally healthy" but has softened, expecting the unemployment rate to be only "a few basis points" above long-term levels by early 2026. This further reinforces the rationale for focusing more on inflation currently. She said, "As uncertainty fades, businesses leverage a strong capital market environment, and I expect economic growth to rebound from the pace of the fourth quarter next year, ultimately putting some downward pressure on the unemployment rate."

Williams: Neutral interest rates remain low

Williams stated during a speech at the Institute for Monetary and Financial Stability at Goethe University in Germany that "the low R-star era continues," indicating that the U.S. economy is still in a low neutral interest rate period.

He explained, "Neutral interest rates are difficult to determine." Williams pointed out that "model-based estimates of the U.S. neutral rate are around 1%," while the bond market "implies a higher rate," but he "does not agree." He added that the neutral rate "may now be around 0.5%," depending on various factors, and emphasized that the Federal Reserve "still needs to pay attention to the effective lower bound," while faster productivity growth could "raise real rates."

In the Q&A session, Williams further noted that in real-world policymaking, current data is more important than estimates of neutral interest rates.

Barr: The economy is showing two speeds

Barr stated during a virtual event held by Fed Communities on Thursday that there is a significant gap between the top 40% of income and wealth earners and other groups in the economy. He described this situation as "an economy of two speeds, with affluent households performing strongly." Baal pointed out that in an employment market environment of "low hiring and low firing," the low hiring rate may indicate that the application of artificial intelligence (AI) has had some impact in certain industries. For lower-income groups, saving has become increasingly difficult, making them more vulnerable to economic shocks.

The Federal Reserve governor, who resigned from his position as vice chairman responsible for regulation after Trump's election as president, acknowledged that while the Fed has made progress on inflation issues, there is still work to be done. He emphasized that the Fed must focus on ensuring that the job market remains robust.

Discrepancies on Interest Rate Cuts Continue to Worsen

The FOMC decision statement released last Wednesday revealed rare divisions within the Fed over the past six years. Among the 12 FOMC voting members, two voted against the decision. One of them, the Fed governor appointed by Trump and one of the most dovish officials within the Fed, Governor Milan, advocated for a 50 basis point rate cut, while Kansas City Fed President Schmidt argued for keeping rates unchanged. In the past 40 years, there have only been five meetings where opposing views on tightening and loosening monetary policy were present, the last being in September 2019.

Last Friday, Dallas Fed President Logan and Hamak both indicated that they preferred to keep rates unchanged, stating that they would not support a rate cut in December unless there was clear evidence that inflation would decline faster than expected or the labor market would cool more quickly.

Schmidt noted in a statement last Friday, "In my assessment, the labor market is essentially in a balanced state, the economy shows sustained momentum, and inflation remains too high."

Waller, a popular candidate for the next Fed chair and a permanent voting member of the FOMC during his term, stated last Friday, "Our biggest concern right now is the labor market. We know inflation will come down, so I still advocate for a rate cut in December because all the data suggests we should."

On Monday, Milan reiterated that the neutral policy rate is far below the current level and should be achieved through a series of 50 basis point rate cuts.

On Wednesday, Milan said that he believes it is still a "reasonable action" for the Fed to continue cutting rates, including at the December FOMC meeting. He referred to the ADP employment data released on Wednesday as a "comforting surprise," but believed that the trend before the U.S. government shutdown is still ongoing: moderate job growth, slowing wage growth, and labor demand may not be as strong as before. All of these indicate that interest rates could be lower than the current level