Fed's interest rate decision: Is the Bull Market ending? Or is Trump pushing the market again?

Federal Reserve officials are united in their determination to quell the most serious inflation in forty years, but they are no longer in agreement on how high to maintain the Intrerest Rate policy to achieve their goals.

Last week, the Federal Reserve cut interest rates for the third time this year with nearly unanimous vote. But at the same time, officials seem to have divided into three factions on the future Interest Rate prospect.

The disagreement centers on how the Federal Reserve should actively bring the inflation rate down to the target of 2% and at what level the central bank needs to maintain the Interest Rate to achieve success.

"There is no sign of consensus," said Chris Low, chief economist at FHN, when discussing the forecast for the benchmark federal funds Intrerest Rate. Most Fed officials expect the Intrerest Rate to range from 3.1% to 3.9% by 2026.

The result of this debate is closely watched on Wall Street.

Inflation Anxiety

Until a few months ago, inflation seemed to be approaching the Fed's 2% target. The central bank's preferred inflation gauge - the Personal Consumption Expenditures (PCE) index - slowed from a 40-year peak of 7.3% in 2022 to a 3.5-year low of 2.1% in September. However, as of November, this inflation gauge has rebounded to 2.4%.

More importantly, Federal Reserve officials believe that inflation at the end of 2025 is likely to be slightly higher than at the end of 2024. Officials raised their forecast for 2025 to 2.5%.

"Inflation has proven to be more stubborn than many people expected," said Richard Moody, Chief Economist at Regions Financial.

The recent uncertainty in the inflation path may keep the US Intrerest Rate higher than the level desired by Federal Reserve officials.

In fact, Federal Reserve officials last week cut their expected number of interest rate cuts in 2025 by half to just two.

However, due to internal divisions within the Federal Reserve, even the prospect of two interest rate cuts in 2025 is not guaranteed.

Rare dissent within the Federal Reserve

This divergence is evident in the so-called dot plot, which reveals the views of 19 Federal Reserve officials, including seven board members and 12 regional Fed presidents.

Four officials, one of whom, newly appointed Cleveland Fed Chairman Hamak, voted against the rate cut last week.

This kind of dissent is quite rare at the Federal Reserve.

Hammack said she would like to see more evidence that price pressures are easing again. "Inflation remains stubbornly high, and recent progress in restoring inflation to 2% has been uneven," she said in a statement.

Perhaps even more surprisingly, Hamak believes that the Federal Reserve is close to the so-called neutral Interest Rate.

This concept refers to the ideal level of Federal Reserve policy Intrerest Rate, which means neither dangerously pushing the economy beyond its speed limit nor slamming on the brakes to suppress growth.

Where is the Intrerest Rate?

If the Fed is already close to the neutral Intrerest Rate, this may mean that the central bank will only cut the Intrerest Rate by another 50 to 75 basis points. After the 25 basis point cut last week, the Intrerest Rate remains in the range of 4.25% to 4.5%.

Hamaq is just one of six Federal Reserve officials who estimate that the Federal Reserve is close to the neutral interest rate.

And a larger group of eight officials - possibly including Fed Chairman Powell - believe that the neutral interest rate should be much lower, possibly 3% or lower.

William Williams, a key ally of Powell and president of the New York Fed, said, 'I don't think we've reached the long-term neutral Intrerest Rate at all. Perhaps the neutral Intrerest Rate is slightly higher (than we thought before), but much lower than where we are today.'

If he is right, the Federal Reserve may still need to significantly reduce the Intrerest Rate.

The third, smaller group believes there is more room to cut interest rates.

The road ahead

Of course, which of the three groups will prevail will depend on the extent of next year's inflation slowdown. If recent inflation increases are proven to be temporary, the Fed may increase the number of rate cuts to 3 or more in 2025.

"In the next 12 to 18 months, Intrerest Rate may still drop significantly," Chicago Fed President Gulspie insisted last week.

Goolsbee and others have another factor behind their desire to lower the Interest Rate. Some Fed officials who supported the rate cut last week are less concerned about inflation and more concerned about the soft US job market and its impact on the economy.

Even if inflation remains at a certain high level, they tend to cut interest rates at a faster pace to ensure the current economic expansion is sustained.

Last week, San Francisco Fed President Daly said, "What I hear more than you might imagine is, don't let a tenth of a percent drop in the inflation rate hurt the economy. I don't want to see the unemployment rate rise just to achieve the 2% target a quarter early."

The challenge facing Powell is how to bridge the divergences within the Federal Reserve against the backdrop of the re-election of President Trump in the United States. Trump took a harshly critical stance toward the Fed chair during his first term. Therefore, this will not be an easy task.

However, do not expect any major moves next year. The debates at the Fed are typically genteel affairs, not heated intellectual brawls.

Powell also enjoys broad support within the Fed, with rare instances of any dissenting votes, let alone multiple dissents.

The previous chairman of the Federal Reserve who failed in a crucial vote was Paul Volcker in the 1980s, during one of the most turbulent periods in US economic history.

The market's expectations for Trump's inauguration on January 20th are crucial, focusing on Zilong for an in-depth analysis of the latest market trends