The internal divisions within the Federal Reserve have intensified in recent weeks, and on the eve of the December policy meeting, officials have expressed starkly different positions, all against the backdrop of Chairman Powell's continued silence.
This policy drama reached its climax last Friday: as several policymakers indicated a preference to keep interest rates unchanged, New York Fed President Williams—often seen as a spokesperson for the Fed Chair—signaled support for a rate cut. Since the Fed's last rate decision on October 29, Powell himself has not publicly commented.
However, according to recent commentary statistics, other voting members of the Federal Open Market Committee (FOMC), responsible for setting interest rates, are now nearly evenly divided in their policy direction — this almost guarantees that regardless of the outcome of the December 10 meeting, multiple officials will cast dissenting votes.
Dissenting votes, which had been a rare phenomenon during Powell's tenure, have shown a significant upward trend this year. As policymakers struggle to balance the competing goals of supporting a weak labor market and controlling inflation, there has not been a unanimous vote since June. The government shutdown has delayed the release of several key economic data, further weakening officials' ability to reach a consensus on priority goals.
"Powell's choice not to speak at this moment allows every member of the FOMC to express their opinions and be heard," said Claudia Sahm, chief economist at New Century Advisors and former Federal Reserve economist. "He gives them ample space to show their differences, which is actually a good thing, because the current decision-making is difficult and should involve thorough debate."
Market expectations are in disarray
Recent policy signals have led to confusion in the market regarding expectations for the next interest rate move, with traders, accustomed to speculating on the Federal Reserve's consensus views, now starting to tally the voting tendencies of individual policymakers.
On the eve of the October policy meeting, investors had viewed a December rate cut as a foregone conclusion. However, with the emergence of hawkish sentiment, the probability of a rate cut, according to federal funds futures pricing, plummeted below 30%. But after Williams' remarks last Friday, the probability has rebounded above 60%.
This central bank has always prided itself on setting interest rates through consensus decision-making, which has been a hallmark of Powell's chairmanship since he took office in 2018 and will end in May next year. This has resulted in an extremely low number of dissenting votes in the eight policy meetings held each year, conveying market confidence in its decisions, and research shows this can ensure the committee's intentions are clearly and effectively communicated. However, critics argue that this can also lead to the suppression of important viewpoints through "groupthink."
"Regarding the accusation of groupthink, those who criticize us should be prepared. You might see the FOMC exhibiting the least groupthink it has in a long time," said Federal Reserve Governor Waller. Waller had opposed the decision to maintain interest rates in July alongside his colleague Bowman — the first time in 32 years that two Federal Reserve governors voted against the chair.
In the follow-up meeting in mid-September, Milan, who was nominated by Trump to join the Federal Reserve Board that month, voted against his colleagues' decision to cut rates by 25 basis points, as he himself favored a larger rate cut. At the Federal Reserve meeting on October 28-29, Milan again dissented for the same reason, while Kansas City Fed President Schmidt cast a dissenting vote in the opposite direction — Schmidt wants to maintain stable rates, believing that further rate cuts could reignite inflation.
This viewpoint has gained increasing resonance among Federal Reserve policymakers in recent weeks. Of the 12 officials with policy voting rights this year, 5 have already hinted at a preference to remain on hold next month. Federal Reserve Governor Barr, who has previously leaned towards supporting the labor market, stated last week: "We need to be cautious about monetary policy right now."
Other former dovish officials have also hinted that they may be more inclined to keep rates steady next month, including Chicago Fed President Goolsbee. He has never cast a dissenting vote during his nearly three years at the Federal Reserve, but indicated that he would exercise that right if he felt it necessary. "If I ultimately strongly support a certain position and it is contrary to everyone else's views, so be it. I think that is healthy," Goolsbee said during a call with reporters last Thursday. "I don't think there is anything wrong with casting a dissenting vote." He acknowledged that this year's dissenting vote count has surpassed recent levels in Federal Reserve history, but he also stated that this move has positive implications.
From a longer-term perspective of the Federal Reserve's development, this situation is not without precedent. In the 1980s, when the Federal Reserve pushed interest rates to punitive highs to curb high inflation, and in the 1990s, when persistent concerns about price pressures made many policymakers worry about excessive easing, there were numerous dissenting votes.
"Uncertainty is a common feature of macroeconomic and monetary policy-making," noted Dallas Fed President Logan last Friday. "Policymakers cannot know the state of all relevant aspects of the economy, let alone understand precisely how each segment of the economy operates or the shocks that may occur. However, policymakers still must make decisions."
The interest rate decision in December is becoming one of the most suspenseful in years. Some, like Deutsche Bank senior economist Brett Ryan, believe that Williams' comments last Friday have locked in a rate cut outcome, but others are not so sure. Sahm admitted: "I do think this is still a 50-50 situation." $BTC
