Divisions within the Federal Reserve deepen: Three officials express concerns about inflation and publicly oppose interest rate cuts this week

The resistance to the Federal Reserve's interest rate cut decision this week is becoming evident. On the same day, three Fed officials coincidentally publicly stated their opposition to the rate cut decision at this week's Fed meeting, confirming the warning issued by Fed Chairman Jerome Powell shortly after the announcement of the rate cut on Wednesday—that another rate cut in December is far from a certainty.

On Friday, before the U.S. stock market opened, Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack both expressed their preference to keep interest rates unchanged. Kansas City Fed President Jeff Schmid earlier issued a statement detailing his reasons for voting against the decision at this week's FOMC meeting.

These statements indicate that in the six weeks leading up to the next monetary policy meeting on December 9-10, there will be intense debate within the Fed about whether to continue cutting rates. One side believes further easing is needed to support the labor market, while the other is more concerned about inflation issues. Market expectations for a rate cut in December significantly cooled on Friday, with the three major U.S. stock indices narrowing their gains in early trading due to the hawkish statements from officials.

After the U.S. stock market closed on Friday, Federal Reserve Governor Chris Waller, who has permanent voting rights on the FOMC, also weighed in, adding fuel to the debate over the timing of the Fed's rate cuts. He said:

"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."

The FOMC meeting that just concluded on Wednesday decided to cut rates by 25 basis points for the second consecutive time. An article from Wall Street Journal mentioned that among the 12 voting members of the FOMC, two opposed this decision, including Trump-appointed Governor Stephen Miran, who, like last time, advocated for a 50 basis point cut, while Schmid opposed it because he supported holding steady, reflecting a clear division within the Fed's decision-making body.

Three Officials United in Opposition to Rate Cuts

Logan stated at a meeting in Dallas:

"I do not believe a rate cut is necessary this week."

"Unless there is clear evidence that inflation will decline faster than expected, or the labor market will cool more quickly, I find it hard to support a rate cut in December."

Schmid pointed out in his statement:

"In my assessment, the labor market is essentially in balance, the economy shows sustained momentum, and inflation remains too high."

Hammack, during a panel discussion with Atlanta Fed President Raphael Bostic, stated that she believes the rate cut this week has brought the federal funds rate target range down to 3.75% to 4%, "right around" her estimate of the neutral rate.

Hammack said:

"I do believe we need to maintain a certain degree of (monetary policy) restrictiveness to help bring inflation back to target levels." Although Logan and Hamak do not have voting rights on the FOMC this year, both will rotate into voting members in 2026. Therefore, the FOMC voting results disclosed in this week's decision statement do not reflect the positions of Logan and Hamak. Their speeches on Friday indicated that they, like Schmidt, are on the opposing side.

Nick Timiraos, a senior Federal Reserve reporter known as the "New Federal Reserve Correspondent," pointed out on Friday that Logan was one of the 11 candidates interviewed by Treasury Secretary Basant for the next Federal Reserve Chair, but she did not make it to the second round of interviews.

Divergence in Neutral Rate Assessment Becomes Focus of Debate

Officials' differing assessments of the so-called neutral rate have become the core of the debate. The neutral rate refers to the theoretical interest rate level that neither stimulates nor suppresses economic growth. The forecasts released in September showed that the committee's estimates of the neutral rate ranged from slightly above 2.5% to slightly below 4%.

Hamak believes that current rates are close to her estimate of the neutral rate, thus requiring some degree of restriction.

Bostic, who will have voting rights at the FOMC meetings in 2027, stated that he "ultimately supports" a rate cut decision because he believes that even after a rate cut, monetary policy would still be "in a restrictive zone." However, he also noted, "We cannot forget that inflation is a significant issue and must be brought back to the 2% target. With every step we take, we are getting closer to the neutral level in a way that makes me uneasy."

Powell stated on Wednesday that his own assessment is that policy remains "slightly restrictive," although he acknowledged that rates are now in the "3% to 4% range where many neutral rate estimates are located."

Uncertainty Surrounding December Rate Cut Prospects

Powell stated at the FOMC post-meeting press conference on Wednesday, "There are increasingly more voices suggesting that perhaps we should at least pause once," before considering the next rate cut. This statement led to a significant adjustment in the bond market on Wednesday, as investors were almost entirely convinced that there would be another 25 basis point rate cut in December.

Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank Securities, stated, "I think the resistance to a rate cut that Powell faces in December may be greater than the resistance to pausing the rate cut, which is one of the reasons Powell is behaving so hawkishly."

Luzzetti mentioned that as more Federal Reserve officials make public comments in the next week or two, the market will gain more understanding of this situation.

By the close of trading on Friday, CME tools indicated that the futures market expected the probability of the Fed continuing to cut rates by 25 basis points at the next meeting in December to drop to below 69%, down from nearly 73% a day earlier and close to 92% a week ago.

Balance Sheet Reduction Set to End

The Federal Reserve also announced on Wednesday that it would stop its three-year balance sheet reduction (quantitative tightening) on December 1, following a rise in short-term interest rates in the money market over the past few weeks. Logan expressed support for this decision on Friday, believing it should help alleviate financing pressures The Federal Reserve stated that it will continue to reduce its mortgage-backed securities portfolio and reinvest the proceeds into Treasury bonds, but did not announce additional liquidity measures to help alleviate financing costs.

Logan said, "Once the balance sheet reduction is complete, the Federal Reserve can further reduce the supply of reserves by keeping assets unchanged for a period of time and allowing a reduction in reserves to offset the trend growth of other liabilities such as currency. However, if the recent rise in repo rates is not temporary, I believe the Federal Reserve needs to start purchasing assets to prevent reserves from declining further and to maintain an adequate supply of reserves."