The Federal Reserve Faces Its Biggest Internal Disagreement in Years! Is Powell No Longer Hawkish This Time?

Written by: White55, Mars Finance

As divisions intensify between increasingly hawkish and dovish stances among Federal Reserve policymakers, Chair Jerome Powell faces a daunting task of coordination at this week’s central bank meeting. While markets widely expect another rate cut from the Fed, the real challenge lies in post-decision policy communication. Powell must carefully balance opposing internal viewpoints and leave room for flexibility regarding the future policy path.

A Deeply Divided Committee

Currently, the degree of division within the Federal Open Market Committee (FOMC) is considered the most severe during Powell’s nearly eight-year tenure. This split is directly reflected in the voting power distribution: among the 12 voting members, five have already expressed opposition or doubts about further rate cuts.

Since 2019, there has never been a meeting with three or more dissenting votes, and such a situation has only occurred nine times since 1990. Therefore, the market is closely watching whether this meeting will see an unusually high number of dissenting votes, which itself underscores the complexity and uncertainty of policy-making.

This deep division stems from divergent interpretations of the contradictory state of the U.S. economy.

One side (the doves) is more concerned about signs of weakness in the labor market. For example, New York Fed President John Williams believes downside risks in the labor market have increased while inflationary pressures have eased, thus advocating that “there is still room for further rate cuts in the near term.”

The other side (the hawks) worries about sticky inflation. Officials like Boston Fed President Susan Collins emphasize that progress on inflation has stalled and that the current “modestly restrictive” monetary policy stance is necessary to ensure inflation returns to the 2% target. They therefore remain cautious about further rate cuts. These differing emphases on conflicting economic data make it difficult for the committee to reach a unified opinion.

The “Hawkish Cut” Communication Strategy

Given such internal divisions, market analysts believe Powell is most likely to adopt a so-called “hawkish cut” communication strategy. This means the Fed may approve a 25 basis point rate cut at the December meeting, but in the post-meeting press conference, Powell will strive to avoid sending strong signals of a forthcoming easing cycle—especially not pre-committing to another rate cut in January. Bank of America analysts point out that Powell may attempt to balance the expected rate cut with hawkish rhetoric.

Specifically, this communication strategy may focus on two aspects:

First, emphasizing that future policy decisions will be strictly data-dependent, particularly on upcoming employment and inflation data, suggesting that this rate cut does not mark the beginning of a prolonged easing cycle.

Second, signaling that rates are approaching the “neutral rate” level. The neutral rate is the level at which monetary policy neither stimulates nor restrains the economy. By hinting that the stance may soon shift from restrictive to neutral, Powell can attempt to reassure hawkish committee members that the Fed is not moving toward excessive easing.

However, executing this communication strategy faces major challenges. On one hand, Powell needs to appease internal hawkish voices; on the other, he cannot be too dovish, lest markets interpret it as the end of the easing cycle, which could inappropriately tighten financial conditions. He must find a delicate balance between these conflicting objectives.

Decision-Making Amid Data Gaps and Political Pressure

The Fed faces a unique predicament this time due to the lack of key economic data. Because of the ongoing U.S. federal government shutdown, a series of important economic reports—including October’s employment data—have been delayed. This forces policymakers to make decisions in a “data vacuum,” akin to “driving in heavy fog” and having to slow down. The lack of data not only increases the risk of policy mistakes but also makes it harder for Powell to rely on clear data support when explaining decisions, forcing greater reliance on overall economic judgment and alternative data from the private sector.

Meanwhile, political pressure is also a factor that cannot be ignored. President Trump has repeatedly and publicly pressured the Fed to cut rates and is considering candidates for the next Fed chair. This external pressure has the potential to impact the Fed’s monetary policy independence, raising the political-economic stakes of this meeting. Powell has previously made it clear that the Fed’s policy decisions are “based on data, not politics,” but maintaining this principle amid such complexity requires great determination and wisdom.

Looking Ahead: Uncertainty Becomes the New Normal

Regardless of the December meeting outcome, the Fed’s future policy path is fraught with uncertainty. There is a gap between market expectations and the Fed’s official guidance: futures markets currently price in further rate cuts after January, while some Fed officials prefer to adopt a wait-and-see stance after this cut. Powell may leave room for flexibility in future actions. One possible way to communicate this is to emphasize that further rate cuts will depend on whether the labor market shows “further significant weakness.” This means that if subsequent economic data, especially employment figures, deteriorate significantly, the Fed may still take further action. Conversely, if inflation data unexpectedly rebound strongly, it may support the hawkish view, keeping rates higher for longer.

In addition, academic debate over the “neutral rate” level also points to the long-term complexity of policy-making. FOMC members’ estimates of the neutral rate vary significantly, ranging from 2.6% to 3.9%. This fundamental disagreement means that, even after short-term data-driven decisions, the Fed will still struggle to reach consensus on the fundamental question of what the ultimate rate target should be. The future policy path is destined to be anything but smooth.

In summary, Chair Powell’s core task at this meeting is to seek a fragile balance within a deeply divided committee, using a “hawkish cut” strategy to appease all sides, while striving to uphold the Fed’s independence and credibility under the dual constraints of missing data and political pressure. Regardless of the outcome, heightened uncertainty and market volatility are likely to become the new normal for some time to come.