By Nick Timiraos
The path for interest-rate cuts has been clouded by an emerging split within the central bank with little precedent during Federal Reserve Chair Jerome Powell's nearly eight-year tenure.
Officials are fractured over which poses the greater threat -- persistent inflation or a sluggish labor market -- and even a resumption of official economic data may not bridge the differences.
The rupture has complicated what looked like a workable plan less than two months ago, though investors think a rate cut at the Fed's next meeting is still more likely than not.
When policymakers agreed to cut rates by a quarter of a percentage point in September, 10 of 19 officials, a slim majority, penciled in cuts for October and December. Cutting rates at three consecutive meetings would echo the downward adjustments Powell made last year and in 2019.
But a contingent of hawks questioned the need for further reductions. Their resistance hardened after officials reduced rates again in late October to the current range between 3.75% and 4%. The debate over what to do in December was especially contentious, with hawks forcefully challenging the presumption of a third cut, according to public comments and recent interviews.
Indeed, a key reason Powell pushed back so bluntly against expectations of such a cut at the press conference that day was to manage a committee riven by seemingly unbridgeable differences.
The split was exacerbated by the government shutdown, which turned off the employment and inflation reports that can help reconcile such disagreements. The data void allowed officials to cite private surveys or anecdotes that reinforced earlier assessments.
The dynamic reflected two contingents growing louder and a center with less conviction. Doves worried about labor-market softness but lacked new evidence that would maintain a strong case for cutting. Hawks seized the opportunity to argue for a pause. They pointed to steady consumer spending and signaled concern that businesses were preparing to pass along tariff-related price increases.
Whether officials will cut rates again at their Dec. 9-10 meeting is a tossup. New data could settle the debate. Some officials view the December and January meetings as largely interchangeable, making the year-end deadline feel somewhat artificial. Another possibility: pairing a December cut with guidance that sets a higher bar for further reductions.
The divide is rooted in the unusual state of the economy: simultaneous upward pressure on inflation and stagnant job growth, a combination sometimes called stagflation. Many economists attribute this to the Trump administration's sweeping policy changes on trade and immigration. "It was easier to forecast that we'd have a mild bout of stagflation. It's another thing to live it," said Diane Swonk, chief economist at KPMG.
The last official data released before the government shut down showed a key measure of inflation at 2.9% in August. That was uncomfortably above the Fed's 2% goal and up from 2.6% this past spring, but below forecasts produced after President Trump hiked tariff rates earlier this year.
Officials are divided on three key questions, each of which will help determine the path ahead.
First, will tariff-driven price increases prove to be a one-off? Hawks worry that businesses, having absorbed initial tariffs, will pass more along next year, keeping price pressure persistent. Doves see businesses' reluctance to pass more of the tariffs along thus far as a sign demand is too weak to sustain inflation.
Second, has monthly payroll growth fallen -- from 168,000 in 2024 to just 29,000 on average for the three months through August -- because of weaker demand for workers by businesses, or a weaker supply because of reduced immigration? If the former, keeping rates high risks recession. If the latter, cutting could overstimulate demand.
Third, are interest rates still restrictive? Hawks argue that after trimming rates by a half-point this year, rates are at or near the neutral level that neither stimulates nor restrains growth, making further cuts risky. Doves think rates remain restrictive, giving the Fed room to support the labor market without reigniting inflation.
"People just have different risk tolerances," Powell said after the October meeting. "So that leads you to people with disparate views."
Officials have wrestled with these questions for months. Powell tried to settle the debate in a speech in Jackson Hole, Wyo., in August, arguing that tariff effects would prove temporary and labor-market weakness reflected demand, siding with the doves in favor of rate cuts. Data released a few weeks later vindicated his gambit: The economy had essentially stopped adding jobs.
Nonetheless, the speech went further than some colleagues were comfortable with. By the Oct. 29 meeting, the hawks had dug in. Kansas City Fed President Jeff Schmid dissented against that month's cut. Bank presidents who didn't have a vote, including Cleveland's Beth Hammack and Dallas's Lorie Logan, quickly made public their opposition to lowering rates.
At the news conference following that meeting, Powell cut to the chase before even taking questions, volunteering that a December rate cut wasn't a foregone conclusion. "Far from it," he said with uncharacteristic bluntness.
Powell was fulfilling his job to make sure the disparate factions of his committee were all heard. That sort of "committee management" helps forge consensus when the time comes to act.
Powell has in the past encouraged colleagues to deliver such clues in the policy statement released before his postmeeting press conference. "The worst time to change policy expectations is in the press conference, " he said at a July 2019 Fed meeting, according to a transcript published earlier this year.
Back then, he faced similar concerns: A hawkish contingent resisted cutting, and officials worried investors were too certain about the next move. Powell and his colleagues wordsmithed changes to signal caution.
But broadening the statement last month to reflect hawks' concerns would have alienated doves, leaving Powell to deliver the message. "There's a growing chorus now of feeling like maybe this is where we should at least wait" for a meeting, Powell said.
Chicago Fed President Austan Goolsbee illustrates how the chorus is changing its tune. In September, he had been one of two officials who penciled in just one more cut for the year -- putting him between the doves who penciled in two more cuts and hawks who wanted none.
While it was reasonable to think tariffs would produce just a one-off rise in prices, hawks worry the experiences of the 1970s or 2021-22 showed such thinking could be badly flawed. "'Transitory' price increases that last for three years are not perceived as transitory," Goolsbee said in an interview last week.
Inflation figures for September, released days before the October decision, told a mixed story. The headline numbers were milder than anticipated due to a sharp slowdown in housing costs. But hawks focused on troubling details: An underlying measure that excludes volatile food and energy prices accelerated to 3.6% annualized over the prior three months, from 2.4% in June. A measure of nonhousing services, which shouldn't have been directly affected by tariffs, was also firm.
"The last thing we saw before the lights went out" was inflation moving in the wrong direction, Goolsbee said.
As hawkish opinion has hardened, doves have had less to say publicly, though they haven't folded. Prominent among those doves are three appointees of President Trump, who has made clear his desire for lower rates. Governor Stephen Miran, a White House adviser who joined the Fed ahead of the September meeting, immediately dissented for a larger half-point cut. The other two, Michelle Bowman and Christopher Waller, are among five finalists being considered to succeed Powell as Fed chair next year.
Doves think the current situation bears little resemblance to 2021-22 and fret that the Fed will underreact to labor-market slowing. But the data blackout worked against them. While alternative data on jobs was ubiquitous, price information was far spottier. Hawks warned the Fed could emerge from a data fog early next year to find inflation running hot.
San Francisco Fed President Mary Daly made the dovish case in an essay Monday, arguing that slowing wage growth means the jobs slowdown reflects falling labor demand, not supply. She warned against being so focused on avoiding 1970s-style inflation that the Fed chokes off a potential productivity boom similar to the 1990s. The economy risks "losing jobs and growth in the process," she wrote.
Even once the data blackout ends, incoming data may not neatly resolve divisions that often come down to judgment calls about how seriously to take risks that might be remote and months away.