Fed Divide Intensifies: Cautious Game on Rate Cut Path and Market Impact

Recently, the Federal Reserve has seen increasing disagreement regarding its rate cut path, with officials engaging in fierce debate between inflation risks and downward economic pressures, leading to unprecedented caution in monetary policy decisions. This divergence not only reflects conflicting signals from US economic data but also suggests a high degree of uncertainty regarding future policy direction.

Currently, a clear "dovish" and "hawkish" divide exists within the Fed. Dovish officials, such as Atlanta Fed President Bostic and Minneapolis Fed President Kashkari, advocate for a faster pace of rate cuts, arguing that inflation has cooled significantly and the risk of a softening labor market has increased, necessitating rate cuts to support the economy. Kashkari even predicts two more 25-basis-point rate cuts before the end of the year. Hawkish representatives, such as newly appointed Governor Milan, oppose a 25-basis-point rate cut in September, insisting on a larger cut to address the economic slowdown, highlighting concerns about insufficient policy力度 (policy strength/strength). Chairman Powell, on the other hand, adopts a balanced stance, emphasizing the need for careful balancing between the dual mandates to avoid overly aggressive or delayed policy adjustments.

The complex performance of economic data is the core reason for this intensified divergence. On the one hand, July's CPI fell to 2.8%, and core CPI dropped to 2.9%, indicating a continued easing of inflationary pressures. On the other hand, non-farm payrolls increased less than expected, the unemployment rate rose to 3.9%, and the University of Michigan consumer sentiment index fell below 60, suggesting underlying concerns about the labor market and consumer confidence. Furthermore, the government shutdown delayed the release of key data such as the September jobs report, further complicating policy decisions. Officials held differing opinions on whether inflation had truly "sustainably fallen to 2%" and the extent of the economic slowdown, leading to a divergence in policy stances.

The internal disagreements within the Federal Reserve directly triggered sharp fluctuations in market expectations. Interest rate futures showed that investors' probability of a 25 basis point rate cut in November increased from 60% to 68%, but bets on further rate cuts in December remained uncertain. Market risk aversion intensified, with increased inflows into gold ETFs and hedge funds accelerating their allocation to technology stocks and defensive assets. Institutional projections revealed three scenarios: the baseline scenario was a pause in September followed by a rate cut in November; an aggressive scenario might involve an earlier rate cut triggering a market surge; and a conservative scenario would maintain a "higher for longer" approach, putting pressure on emerging markets. The Federal Reserve's future monetary policy will be highly data-dependent. If inflation data continues to decline and the labor market does not deteriorate sharply, most officials may support gradual interest rate cuts, maintaining the path of two 25-basis-point cuts this year. However, if employment data weakens significantly or inflation rebounds, the divergence may intensify further, and there could even be a sudden adjustment in the pace of rate cuts. Powell's remarks at the Jackson Hole symposium suggested that "policy rates are close to neutral," but the meeting minutes emphasized the need to be wary of upside risks to inflation, showing the policymakers' delicate balance between "cautious easing" and "risk prevention."

The internal divisions within the Federal Reserve reflect the fragility and uncertainty of the US economic recovery. Under the dual pressures of inflation and employment, monetary policy is entering a "deep water zone," and every interest rate decision will become the focus of market attention. In the coming months, every fluctuation in economic data could trigger a significant shift in policy expectations, and global markets need to be fully prepared for this uncertainty.