Fed Policy Divide Intensifies, Expectations for December Rate Cut Cool Sharply​

On October 29 (local time), the Federal Open Market Committee (FOMC) of the Federal Reserve announced a 25-basis-point cut in the federal funds rate target range to 3.75%-4.00% by a vote of 10 in favor and 2 against. This marked the second rate cut since September and the fifth cut since the Fed launched its easing cycle in September 2024. However, the resolution highlighted a severe divide within the Fed over monetary policy. Hawkish officials, including Kansas City Fed President Schmid and Dallas Fed President Logan, explicitly opposed an "early rate cut," emphasizing that inflationary pressures persist. As a result, market expectations for a December rate cut have cooled sharply, with the probability dropping from a previous 92% to approximately 61%.​

At this FOMC meeting, the policy divide formed a clear "dove-hawk confrontation." Kansas City Fed President Schmid cast a dissenting vote, advocating for maintaining the current interest rate level. In a post-meeting statement, he noted that the labor market is generally balanced and the economy retains growth momentum, but inflation remains excessively high—well above the Fed’s 2% target. Data shows that U.S. consumer prices rose 3% year-on-year in the 12 months ending September, meaning inflation has exceeded the target for more than four consecutive years. Businesses in Schmid’s district have also continued to express concerns about rising costs. He further pointed out that current monetary policy is only in a "moderately tight" state, and financial market conditions remain loose. Cutting rates at this stage would hardly ease structural pressures in the labor market; instead, it might undermine market confidence in the Fed’s commitment to its inflation target and trigger more persistent inflationary pressures.​

Although Dallas Fed President Logan does not hold a voting seat this year, as a participant in FOMC meetings, she maintained a similarly tough stance. She clearly stated that she "does not see a reason for a rate cut this week" and emphasized that she would not support another rate cut in December unless there is clear evidence that inflation will fall sharply or the labor market cools rapidly. Logan’s remarks suggest that debates within the Fed over the direction of monetary policy will intensify in the next six weeks. In stark contrast to the hawks, Fed Governor Stephen Milan advocated for a one-time 50-basis-point rate cut. His dovish stance stands in sharp opposition to the hawks’ caution, highlighting the huge divergence within the Fed in assessing the economic situation.

Fed Chair Powell’s remarks at the post-meeting press conference further amplified policy uncertainty. Shifting away from his previous dovish leanings, he sent hawkish signals, making it clear that a December rate cut is "by no means a done deal." He stressed that monetary policy has no preset path and will increasingly depend on economic data for decision-making. Powell compared the current lack of key economic data—caused by the U.S. government shutdown—to "driving in fog," emphasizing that the Fed will adopt a more cautious approach amid extremely high uncertainty. This statement forms a delicate balance with the Fed’s simultaneous decision to end quantitative tightening (QT) starting December 1. The latter is interpreted by the market as a dovish signal for liquidity management, marking the phased end of the balance sheet reduction cycle launched in 2022. The Fed’s total assets have fallen from a post-pandemic peak of 9trilliontoapproximately 6.6 trillion.​

The market has reacted strongly to the Fed’s internal divide and Powell’s hawkish comments, with expectations for a December rate cut cooling dramatically. Interest rate swap contracts linked to the Fed’s December meeting show that the probability of a rate cut has plummeted from 92% to around 61%, and some institutions even believe the probability has dropped to roughly 50%. Capital markets experienced short-term volatility: the U.S. dollar weakened initially after the resolution was announced, and spot gold prices jumped nearly 2% at one point. However, as Powell released cautious signals, the U.S. Dollar Index reversed course and moved higher, while gold prices pulled back to around $3,960 per ounce. Most U.S. Treasury yields declined, with the 2-year Treasury yield falling 3.46 basis points to 3.574% and the 10-year Treasury yield dropping 1.37 basis points to 4.083%.​

Analysts point out that the Fed is currently caught between inflationary pressures and downside economic risks. The internal divide reflects differing judgments on policy priorities: hawkish officials adhere to the bottom line of inflation control, worrying that premature easing could trigger a rebound in prices; doves, by contrast, focus more on economic growth and weakness in the labor market. Over the next six weeks, progress in ending the U.S. government shutdown and the resumption of economic data releases will be key variables influencing the Fed’s December policy decision. Global financial markets will continue to focus on the Fed’s policy moves and the evolution of internal debates.