DWS: Internal divisions within the Federal Reserve have become more pronounced, raising doubts about whether there will be another rate cut in December
DWS Chief U.S. Economist Christian Scherrmann pointed out that the Federal Reserve lowered interest rates by 25 basis points at the October FOMC meeting, but there is intense internal discussion about whether to cut rates again in December, and no consensus has been reached. The voting results indicate an increasing divergence within the Federal Reserve on monetary policy, particularly with the rise of hawkish opposition. Although current economic data has not significantly improved, the specific timing of rate cuts remains unclear, and market expectations for consecutive rate cuts may be overly optimistic
According to the Zhitong Finance APP, Christian Scherrmann, Chief U.S. Economist at DWS, indicated that, as the market expected, the Federal Reserve will lower interest rates by 25 basis points at the October FOMC meeting and announce the cessation of balance sheet reduction in December to balance the securities portfolio. The only surprise was that the number of dissenting votes increased from one to two, with Stephen Miran casting his expected dissenting vote in favor of a 50 basis point cut, while Jeffrey Schmid unexpectedly took a hardline stance against any policy changes. The voting results further highlight the divisions within the Federal Reserve regarding monetary policy, a divergence that has already begun to show in the recent dot plot differentiation and inconsistent statements from officials, with hawkish dissenting voices exacerbating the divisions.
The ongoing weakening of consensus within the FOMC may be related to the government shutdown leading to the absence of key economic data such as inflation, as evidenced by the statement's reliance on past data. Although current data shows no significant improvement in the labor market and inflation, making it difficult to support the Federal Reserve's dual mandate, the risk of unexpected deterioration in both areas is rising. Additionally, the slight wording adjustments in the statement suggest that the Federal Reserve seems to expect a slight acceleration in economic growth, positively impacting employment, but this benefit is unlikely to offset the negative effects on short-term growth and hiring that may arise from the government shutdown.
At the press conference, Federal Reserve Chairman Jerome Powell acknowledged the divisions among FOMC members and discussed the risks associated with the dual mandate. He mentioned that there were intense discussions regarding whether to cut rates again in December, but no decision has been made yet, emphasizing that, in fact, they are still far from a conclusion. It is important to reiterate that rate cuts are based on risk management considerations, as the risks in the labor market may outweigh inflation risks and potential future changes, which again reminds the market that the Federal Reserve does not have a preset policy stance.
Overall, the interest rate decision aligns with DWS's expectations, maintaining the forecast that the Federal Reserve will lower rates to around 3% neutral level within the next 12 months. However, the specific timing of the rate cuts remains unclear, and given the current uncertainties, the market's expectations for consecutive rate cuts by the Federal Reserve may be overly optimistic
