Source: Cailian
Financial Union, October 27 (Editor Xiaoxiang) The Federal Reserve is expected to cut interest rates for the second time in a row this week to support the shaky job market. But attempts to extend the easing cycle beyond October may face renewed opposition from some officials who are still worried about inflation.
Many industry insiders said that although the doves within the Federal Reserve still have the upper hand in the debate and are expected to push for interest rate cuts this month again, hawks among policy makers may still worry about excessive interest rate cuts.
The latest CPI data released last Friday showed that core inflation growth in the United States hit a three-month low in September. Although this strengthens the Federal Reserve's plan to cut interest rates this week, the overall stagnation of the price cooling process is not enough to support the Federal Reserve's reasons for further interest rate cuts in the future.
Nicole Cervi, an economist at Wells Fargo, said, "This data will keep the Fed loose in October, but the fundamentals of inflation have not really changed."
In the first eight months of this year, Fed policymakers had remained inactive while waiting to assess the impact of tariffs and other policy changes on the economy. After hiring slowed sharply this summer, officials decided in September to cut benchmark interest rates by 25 basis points. In the dot chart released that month, they predicted two more interest rates before the end of the year.
Since the September meeting, the latest U.S. labor market data-partly by private data agencies to fill the data gap caused by the government shutdown-has not brought many positive signals in itself. Federal Reserve Chairman Jerome Powell said earlier this month that the labor market "has actually weakened significantly" and noted that there are "considerable downside risks."
Affected by this, interest rate futures markets have now almost completely digested expectations of the Federal Reserve cutting interest rates by 25 basis points this week, another in December, and even further in March next year.
U.S. government bond market investors of $29 trillion, with market expectations for continuous interest rate cuts on the U.S. Federal Reserve, have also scored extraordinary earnings this year – expected to record the best annual performance since 2020.
"It will be very difficult to get the market to abandon pricing a combined 50 basis point rate cut at the next two meetings," said Vishal Khanduja, head of the fixed income team at Morgan Stanley Investment Management. "It will be difficult to justify deviations from market expectations."
Stephen Stanley, chief U.S. economist at Santander's U.S. Capital Markets, also said: "Financial markets have adopted a very aggressive betting strategy, and the Fed leadership has no explicit objection to this."
Are the internal differences increasing?
However, even if the financial markets seem to have “shaped” a blueprint for the Fed’s continued rate cuts, Powell seems to be “leaving it to it,” but that doesn’t mean there won’t be a voice of objection inside the Fed.
Industry insiders said that a group of regional Fed chairmen, including St. Louis Fed Chairman Musalem, Kansas City Fed Chairman Schmid and Cleveland Fed Chairman Hamack, may raise objections. Interest rate forecasts released in September showed that 9 of the Fed's 19 policymakers supported another rate cut this year at most, and 7 of them preferred not to cut interest rates again.
Several officials in this group did acknowledge the slowdown in hiring and supported the decision to cut interest rates in September. But they also pointed out that due to the sharp decline in the number of immigrants, labor supply and demand have shrunk simultaneously. This means that fewer new jobs are needed to keep the unemployment rate stable. Some experts estimate that the current break-even level of maintaining a stable unemployment rate is actually close to the current employment growth rate-the average monthly new jobs in the past three months have been 29,000.
Meanwhile, these officials are again raising concerns about inflation.
While tariffs did not trigger price increases to the extent many expected, Trump’s ongoing announcement of new tariffs has raised concerns that the impact of tariffs may be more lasting.In addition, recent evidence suggests that price pressure is accumulating directly in categories outside the area affected by tariffs.
The president of the Cleveland Federal Reserve, Hamarck, who will receive FOMC voting rights next year, has publicly expressed concern over the surge in service prices this month.The data showed that non-residential core service inflation had declined in early 2025, but has now increased by more than 3 percent for four consecutive months.
Several officials pointed out that the inflation rate has exceeded the Federal Reserve's 2% target for four consecutive years and is not expected to return to the target range until 2028. Such a long period of "exceeding the standard" may significantly increase the risk of rising long-term inflation expectations-a development that is enough to truly alert policymakers.
In her first policy speech this month, Philadelphia’s new Fed chairwoman, Anna Paulsen, emphasized: “The stability of long-term inflation expectations is a key test for monetary policy credibility.
Even Walker, who warned of slowing recruitment earlier this summer, has recently called for cautious rate cuts due to the contradiction between strong growth and a weak labor market.
"One of the two has to change-either economic growth slows to match a weak labor market, or the labor market recovers to match stronger economic growth," Waller said in a speech earlier this month.
In any case, the lack of official data during the government shutdown may make the policy judgment of Fed officials even more foggy. This background means that the Fed will roughly maintain its "course" in September this month, but it is undoubtedly unlikely to say how clear a dovish signal it will release. Citigroup economist Veronica Clark pointed out that this may mean that they will continue the policy path established in the September interest rate forecast-that is, two more rate cuts this year and only one rate cut in 2026.
“The discrepancies are still large, but there is currently not enough evidence to really set the direction of decisions,” Clark noted, “which could be one of the main signals – the current lack of clarity that makes it difficult for policymakers to accurately predict the future.”