Rate Cut Disputes and Leadership Transition: The Federal Reserve at a Historical Crossroads

In December 2025, the European and American financial markets are overshadowed by dual uncertainties: policy divisions within the Federal Reserve (Fed) and impending leadership changes. Federal Reserve Governor Stephen Milan’s latest warning that "pausing rate cuts could trigger a recession," combined with the Trump administration’s upcoming Fed Chair nomination process, has amplified the tension between monetary policy independence and economic outlook. Against the backdrop of a $37.7 trillion national debt and emerging upward pressure on unemployment, this tussle over interest rate direction is profoundly reshaping global asset pricing logic.

Milan’s dovish plea is not an isolated voice. Appointed by the Trump administration, Milan has been a steadfast advocate for aggressive rate cuts since taking office—he voted against all three 25-basis-point rate cuts in 2025, insisting on a one-time 50-basis-point reduction. On December 22, he further clarified his stance: "Unemployment has already risen, and failure to continue lowering policy rates will expose the U.S. economy to recession risks." His core argument is that the Trump administration’s tariff policies have lowered the neutral interest rate by 0.7 percentage points, and the current policy rate range of 3.5%-3.75% remains significantly higher than the reasonable level of 2%. Sustained tightening, he warns, will exacerbate pressures in the labor market.​

However, Milan’s views face strong resistance within the Fed. Hawkish officials, such as Cleveland Fed President Beth Hammack, advocate maintaining current interest rates at least until next spring to await clear signals of declining inflation and labor market stability. This 11:1 voting split breaks the Fed’s long-standing tradition of collective consensus, reflecting a deeper institutional conflict: Milan holds dual roles as White House Council of Economic Advisers Chair and Fed Governor, and his policy mix of "gradually increasing tariffs + aggressive rate cuts" has been questioned by outsiders as subordinating Fed monetary policy to the Trump administration’s trade agenda, seriously challenging central bank independence. Nobel laureate in Economics Paul Krugman bluntly stated that Milan’s remarks essentially provide "intellectual endorsement" for Trumpist economic policies.​

Adding to the complexity, the Fed is poised for a once-in-four-years leadership reshuffle. Trump has explicitly announced that he will nominate a new Fed Chair in the first week of January 2026, with a core requirement that the candidate "supports substantial rate cuts" aimed at lowering the federal funds rate to 1% or even lower. The nomination process has taken a dramatic turn: former front-runner Larry Kudlow, Director of the White House National Economic Council, has seen his approval rating plummet, while former Fed Governor Kevin Warsh—touting the label of "hawkish reformer" and his background as a close ally of Trump—has emerged as the top candidate, with his nomination probability surging to 47%.​

Policy divisions among candidates have further amplified market anxiety. Warsh advocates for "reducing the Fed’s scope + balance sheet runoff" alongside low interest rates, arguing that inflation stems from excessive Fed easing and calling for a return to the core mandate of price stability. Meanwhile, Kudlow, despite emphasizing Fed independence, has lost ground due to his statement that he "would carefully consider the president’s suggestions." More alarmingly, regardless of who is ultimately elected, a "direct reporting line" between the Treasury Department and the Fed is taking shape—U.S. Treasury Secretary Janet Yellen is regarded as a potential "shadow Fed Chair," and the Fed’s resumed monthly $40 billion Treasury purchase program essentially serves as a backstop for government debt financing, raising risks of fiscal dominance over monetary policy.​

Markets have reacted swiftly. Driven by rate cut expectations and policy uncertainty, the U.S. Dollar Index has fallen to a low of 98.26, COMEX gold futures have surged past $4,480 per ounce to a record high, and U.S. stocks have exhibited structural divergence amid the "Santa Claus Rally" and risk aversion—financial and tech stocks lead gains, while policy-sensitive energy stocks face heightened volatility. Barclays forecasts that the Fed may be forced to cut rates twice in 2026, but if the new Chair pursues aggressive easing, there is a possibility of larger-than-expected rate cuts.​

The essence of this standoff surrounding the Fed lies in the convergence of three core contradictions: the balancing act between economic fundamentals (falling inflation and rising unemployment), the institutional conflict between monetary policy independence and political interference, and the divergence between short-term market stability and long-term fiscal sustainability. For global investors, two key developments warrant close attention in the coming months: the final outcome of the January Fed Chair nomination and whether the unexpected 2.6% year-on-year decline in core CPI in November can break the policy deadlock.​

Historical experience shows that when central banks become tools of political agendas, inflationary spirals and market volatility often follow. The Federal Reserve stands at a historical crossroads—its ultimate decision will not only determine whether the U.S. economy can achieve a soft landing but also reshape the trust foundation of the global monetary system. In this contest between power and expertise, any miscalculation could trigger a butterfly effect, casting a shadow over the already fragile global economic recovery.