Recently, there has been a rare internal division within the Federal Reserve (Fed) as officials are divided on whether addressing persistent inflation or a sluggish labor market is the more pressing issue, making it uncertain whether there will be another rate cut in December.
During the October meeting, Fed officials had intense debates with the “inflation hawks” advocating for a pause in rate cuts and the “doves” expressing concerns about slowing job growth. With government shutdown causing a halt in the release of employment and inflation data, officials had to rely on private company surveys and market rumors to assess the economic outlook, further deepening the divisions between the two camps.
Since September, the Fed has cut interest rates twice consecutively to a range of 3.75% to 4%. Originally planning for another cut before the year-end, after the October meeting, Fed Chair Jerome Powell stated during a press conference, “Whether there will be further policy rate cuts at the December meeting is not predetermined, far from it.” This reflects the intensified internal disagreements within the decision-making committee.
This division stems from the rare phenomenon of “stagflation” currently present in the US economy, where inflation faces upward pressure while job growth remains stagnant, a combination sometimes referred to as stagflation.
Chief economist at KPMG, Diane Swonk, stated, “Predicting mild stagflation is easy, but actually experiencing it is quite different.”
Sources noted that during the October meeting, some officials were pushing for a pause in rate cuts, believing that the current rates were approaching a neutral level and further monetary easing might rekindle inflationary pressures. However, the doves argued that slowed wage growth and stalled hiring indicated weak labor market demand, suggesting that a slow Fed action could lead to an economic downturn.
According to the last official data released before the government shutdown, the core inflation rate in August stood at 2.9%, exceeding the Fed’s 2% target and the spring’s 2.6%, but still lower than President Trump’s earlier predictions after increasing tariff rates earlier this year. Meanwhile, from June to August, there was an average monthly job addition of only 29,000, significantly lower than the 168,000 monthly job additions in 2024.
Amid the current economic environment, three major controversial points have emerged within the Fed:
Firstly, is the price increase triggered by tariffs a one-time event? Hawks are concerned that after absorbing the initial tariff costs, companies will pass on more costs to consumers next year, continuing to drive prices higher. Doves argue that companies have so far been reluctant to pass on more tariff costs to consumers, indicating weak demand that is insufficient to support inflation.
Secondly, is the slowdown in non-farm job growth due to weak labor demand or a decrease in labor supply due to reduced immigration? If it’s the former, maintaining high rates could lead to an economic downturn; if it’s the latter, rate cuts might overstimulate demand.
Thirdly, do interest rates still have a restrictive effect on the economy? Hawks believe that after a 0.5 percentage point rate cut this year, rates are already at or near a neutral level, neither stimulating nor inhibiting economic growth, thus posing a greater risk for further rate cuts. Doves argue that interest rates still have a restrictive effect and, without reigniting inflation, rate cuts could support the labor market’s recovery.
In August, Powell tried to ease this debate in his speech at Jackson Hole, Wyoming, stating that the impact of tariffs was temporary and the soft labor market reflected weak demand, aligning himself with the doves in support of rate cuts. Data released weeks later confirmed his viewpoint: economic slowdown had effectively halted new job opportunities.
However, voices from the hawks resurfaced at the October 29 meeting. Kansas City Fed President Jeff Schmid opposed a rate cut that month. Federal Reserve Bank Presidents without voting rights, such as Beth Hammack of the Cleveland Fed and Lorie Logan of the Dallas Fed, openly expressed their opposition to rate cuts as well.
During the press conference after the meeting, Powell straightforwardly stated that a rate cut in December was not a certain decision.
Chicago Fed President Austan Goolsbee warned that experiences from the 1970s and 2021 show that “transitory inflation” often lasts for years, stating that “a three-year temporary phenomenon is not viewed as temporary by the market.”
At the same time, San Francisco Fed President Mary Daly emphasized this week that the slowing wage growth indicates a slowdown in job growth, reflecting declining labor demand rather than a shortage of labor supply. She warned against over-precaution against inflation, fearing it could stifle potential productivity growth.
Whether the Fed will cut rates again at the December 9-10 meeting is currently difficult to predict. Perhaps new official economic data could end this debate.
For Powell, the challenge he faces is not just economic data but also how to maintain decision consistency in a divided committee. As he stated in October, “People simply have different tolerances for risk, which naturally brings different perspectives.”