Understanding the "Internal Structure" of the Federal Reserve in One Article: How Much Will Interest Rates Be Cut Before the End of the Year? It Depends on Powell and Waller

There are differences within the Federal Reserve regarding the future path of interest rate cuts, and the final decision will mainly depend on Federal Reserve Chairman Jerome Powell and Governor Christopher Waller.

According to news from the trading desk, on October 17, Bank of America Securities published a research report, pointing out that in the current context of the U.S. government shutdown leading to data gaps, the positions of Chairman Powell and Governor Waller will have a decisive impact on the direction of policy.

As the Chairman of the Federal Reserve, Powell not only has voting rights on the Federal Open Market Committee (FOMC) but also holds the dominant role in policy discussions and external communications. His views often influence the overall policy tone.

Waller's uniqueness lies in his public acknowledgment of "interviewing" for the position of Federal Reserve Chairman, which gives his statements a directional significance. More importantly, Waller is regarded as one of the most influential dovish governors within the Federal Reserve, and his shift in stance could signal a broader policy change.

Although both currently lean towards a 25 basis point rate cut in October and December, if inflation and employment data remain strong, the Federal Reserve may choose to "stay put" in December, which is a core risk that the market needs to be wary of.

Powell's Position: Favoring Rate Cuts but Highly Data-Dependent

Powell reiterated his dovish stance this week. He pointed out:

Since the September meeting four weeks ago, the employment and inflation outlooks seem to have changed little.

Although Powell acknowledged the strong GDP and spending data released after the September meeting, he did not place much weight on it, instead emphasizing the downside risks in the labor market, believing that a further decline in job vacancies could push up the unemployment rate.

The Bank of America report analyzes that Powell personally may "most likely want" to cut rates once in October and once in December.

However, the report also notes that if the U.S. economy does not meet the conditions for rate cuts at that time, such as a stable job market and sticky inflation, he would change his mind and lean towards pausing rate cuts in December.

Waller's Position: Dovish but Starting to Shift

Federal Reserve Governor Waller remains one of the more dovish members of the FOMC.

This week, he also stated that the outlook has not changed much since the September meeting. Waller is concerned about weak labor data, is skeptical about the extent of the slowdown in labor supply, and downplays the inflation risks posed by loose financial conditions or tariffs.

However, his recent statements have shown subtle changes, with Waller indicating that after the October meeting (where he hopes for a rate cut), he will "pay attention to how strong GDP data aligns with a weak labor market." He also acknowledged that the inflation rate, excluding tariffs, is about 2.5%.

In Bank of America's view, Waller's baseline forecast remains for a 25 basis point cut at the next two meetings, with potentially more cuts next year. But Waller's acknowledgment of strong GDP suggests he may be open to pausing rate cuts in the future, whereas he previously strongly advocated for lowering rates to a neutral level of 2%.

Dovish Governors vs. Hawkish Regional Fed Presidents

The current composition of the Federal Open Market Committee (FOMC) shows clear internal divisions. The board led by Powell is generally dovish, while the voting regional Fed presidents tend to be more hawkish.

Within the board, doves dominate, but there are dissenting voices:

• Vice Chair Jefferson: Slightly less dovish than Powell, expressing concerns about the stickiness of core services inflation.

• Governor Barr: Displays a "hawkish surprise," worried about inflation staying high for too long, and indicates he may only support one rate cut this year.

• Governor Bowman: Highly aligned with Waller, clearly hoping for two more rate cuts this year, each by 25 basis points.

• Governor Miran: A clear "super dove," believes there should be a total rate cut of 150 basis points this year, marking the "lowest point" in the dot plot.

Regional Federal Reserve Presidents with voting rights are clearly more hawkish:

• Williams (New York Fed): More dovish than expected, supports further rate cuts within the year.

• Goolsbee (Chicago Fed): Recently more hawkish, concerned about potential inflation.

• Schmid (Kansas City Fed): Clearly states that there may not be a need for another rate cut in 2025.

• Musalem (St. Louis Fed): Concerned about excessive easing, believes there may only be support for one rate cut this year.

This standoff between the dovish board and the hawkish regional Fed increases the risk of dissenting votes during rate cuts in October and December.

Bank of America Securities predicts a rate cut in October, with no action in December

Despite the varied statements from Fed officials, the ultimate decision-making power still lies with economic data.

Bank of America analysts believe that the Federal Reserve will cut rates by 25 basis points in October but will pause in December, provided that employment data remains stable and inflation remains sticky.

If the government shutdown significantly delays data releases, or if the unemployment rate sharply rises in future data, a rate cut may occur again in December.

Bank of America Securities predicts that the monthly increase in September's core CPI, to be released next week, will be 0.3%, with a year-on-year increase of 3.1%, which may not be enough to change the Fed's established path.

Additionally, due to escalating trade tensions, the October S&P Global U.S. Manufacturing PMI is expected to drop from 52.0 to 51.0.

In summary, investors should not view the two rate cuts before the end of the year as a certainty. Powell's data dependency and Waller's subtle shift introduce variables for the December policy path. Upcoming inflation and employment reports in the coming weeks will be key in determining whether the Fed will "stick to its guns" or "proceed with caution."