As Federal Reserve policymakers strongly disagree on the state of the economy and whether persistent inflation or sluggish hiring pose a greater threat, what was once thought to be a near certain decrease in interest rates next month now looks more like a coin flip.
Similar to the "affordability" issues that were a major factor in the elections earlier this month, some policymakers have expressed increased concern over ongoing inflation in a number of speeches over the past week.
However, a another group is far more worried about the lack of hiring and the possibility that the "low hire, low fire" work market would deteriorate into one where layoffs become more common.
Tariffs, artificial intelligence, shifting immigration and tax laws, and other issues have created a very unclear economic future, which is reflected in the instability on the Fed's 19 member interest rate setting committee.
"It's reflective of a ton of uncertainty," M&T Bank chief economist Luke Tilley stated. "It's not surprising at all that there's a wide divergence of opinions."
Reduced rate reductions by the Fed may result in higher borrowing prices for vehicles and residences. According to surveys, the general perception that the cost of living is too high is influenced by more costly mortgages and auto loans.
Regardless of whether the central bank lowers rates or not, some Fed observers predict an exceptionally large number of dissents at the December 9-10 meeting.
According to Evercore ISI analyst Krishna Guha, a vote to lower rates would result in up to four or five dissents, and a decision to maintain rates could result in three.
Given the Fed's track record of pursuing consensus, four dissenting votes would be quite rare. In 1992, during the tenure of then Chair Alan Greenspan, four officials last voiced opposition.
Christopher Waller, the governor of the Fed, pointed out on Monday that the Fed is frequently accused of "group think," given that many of its decisions are taken unanimously.
"People who are accusing us of this, get ready," Waller said at a speech in London on Monday. "You might see the least group think you've seen in a long time."
The disruption of economic data caused by the government shutdown has made the disparities worse, which is especially difficult for a Fed that Chair Jerome Powell has frequently referred to as "data dependent." The most recent jobs and inflation reports from the government were for August and September, respectively.
The jobs statistics for September will eventually be released on Thursday, and it is anticipated to show a slight increase of 50,000 jobs during that month as well as a stable unemployment rate of 4.3%.
According to CME Fedwatch, Wall Street investors currently place the likelihood of a December rate drop at 50-50, a significant decrease from almost 94% a month ago.
The stock market's declines this week are partly due to the downturn. Fed policymakers indicated they anticipated cutting twice more, in October and December, after lowering their benchmark rate for the first time this year in September.
However, Powell dismissed the possibility of another cut after enacting a second one on October 29, calling it "not a foregone conclusion far from it."
Additionally, a number of regional Fed officials' statements last week further reduced the market's likelihood of a December decrease. According to Federal Reserve Bank of Boston president Susan Collins, "in all of my conversations with contacts across New England, I hear concerns about elevated prices."
Collins claimed that maintaining the Fed's key rate at its current level of roughly 3.9% would contribute in lowering inflation. The economy "has been holding up quite well" despite the current state of interest rates, she continued.
Raphael Bostic of the Atlanta Fed, Alberto Musalem of the St. Louis Fed, and Jeffrey Schmid of the Kansas City Fed were among the other regional presidents who expressed similar worries.
This year, 12 officials will vote on policy, including Musalem, Collins, and Schmid. In October, Schmid disagreed, arguing that rates should remain the same.
"When I talk to contacts in my district, I hear continued concern over the pace of price increases," Schmid stated on Friday. "Some of this is related to how tariffs affect input pricing, but individuals are concerned about more than just tariffs, or even largely tariffs. I frequently hear worries about electricity as well as growing health care and insurance prices.
On Monday, however, Waller reiterated his demand for a rate cut the next month, arguing that slow hiring is a greater issue. "The labor market is still weak and near stall speed," he stated.
"Inflation through September continued to show relatively small effects from tariffs and support the hypothesis that tariffs are not a persistent source of inflation."
The worry expressed by Schmid and others that the Fed should maintain high rates because inflation has exceeded the Fed's 2% target for five years was also disregarded by Waller. According to Waller, the public hasn't yet been concerned that inflation will remain high for a long time.
"You can't just sort of say it's been above target for five years, so I'm not going to cut," he stated. "You got to give us better answers than that."
According to Esther George, the former president of the Kansas City Fed, there might be agreement for an interest rate drop if, for example, new data for October and November show the economy losing employment.
It's also important to note that, contrary to the expectations of many economists, only Stephen Miran, a governor appointed by President Donald Trump in September, voted against the rate decrease decision in support of an even greater reduction.
"Registering a dissent is a hard decision, and I think you're going to find people that are speaking today that wouldn't follow through with a vote in that direction," she stated. "I think you're going to find enough consensus, whichever way they go."
