Fed speeches reveal split that puts rate cut in jeopardy: persistent inflation vs ‘low-hire, low-fire’ labor market

In several speeches last week, some policymakers registered greater concern about persistent inflation, an echo of concerns about “affordability” that played a large role in the election earlier this month.

Meanwhile, another camp is more concerned about thin hiring and the threat that a “low-employment, low-employment” labor market could escalate into one where layoffs become more widespread.

The turmoil at the Federal Reserve’s 19-member interest rate-setting committee reflects a highly uncertain economic outlook caused by multiple factors, including tariffs, artificial intelligence, and changes in immigration and tax policies.

“It reflects a lot of uncertainty,” said Luke Tilley, chief economist at M&T Bank. “It is not at all surprising that there is such a wide difference of opinion.”

Lowering interest rates by the Federal Reserve could lead to higher borrowing costs for homes and cars. More expensive mortgages and car loans are contributing to the opinion, according to opinion polls, that the cost of living is too high.

Some Fed watchers say an unusually large number of dissenters could occur at the December 9-10 meeting, regardless of whether the central bank cuts interest rates. A decision to cut could lead to as many as four or five dissenters, while a decision to keep interest rates unchanged could lead to three dissenters, said Krishna Guha, an analyst at Evercore ISI.

Four dissenting votes would be highly unusual, given the Fed’s history of seeking consensus. The last time four officials defected was in 1992, under then-President Alan Greenspan.

Fed Governor Christopher Waller noted Monday that the Fed’s critics often accuse it of “groupthink,” as many of its decisions are made by consensus.

“People who accuse us of this, get ready,” Waller said Monday in remarks in London. “You might see the smallest group you think you’ve seen…in a long time.”

The disagreements have been exacerbated by the interruption of economic data due to the government shutdown, which represents a particular challenge for the Fed, which Chairman Jerome Powell has often described as “data-driven.” The latest government report was on jobs for August and inflation for September.

September jobs data will finally be published on Thursday, expected to show a small gain of 50,000 jobs that month and an unchanged unemployment rate at a still low level of 4.3%.

Currently, Wall Street investors put the odds of a December rate cut at 50-50, according to CME Fedwatch, down sharply from about 94% a month ago. This decline contributed to the stock market’s decline this week.

After cutting its key interest rate in September for the first time this year, Fed policymakers signaled that they expect to cut the rate two more times, in October and December.

But after the second cut was implemented on October 29, Powell poured cold water on the prospects of another cut, calling it “not a foregone conclusion — far from it.”

Speeches last week by a group of regional Fed officials also pushed down market odds for a December rate cut. “In all my conversations with contacts across New England, I have heard concerns about rising rates,” Boston Fed President Susan Collins said.

Collins said keeping the Federal Reserve’s key interest rate at its current level of about 3.9% will help bring down inflation. She added that the economy has “remained holding up well” even with lower interest rates.

Several other regional presidents expressed similar concerns, including Raphael Bostic of the Federal Reserve Bank of Atlanta, Alberto Muslim of the Federal Reserve Bank of St. Louis, and Jeffrey Schmid of the Federal Reserve Bank of Kansas City. Muslim, Collins and Schmid are among the 12 officials who voted on the policy this year. Schmid objected in October in favor of keeping interest rates unchanged.

“When I talk to contacts in my area, I hear continued concern about the pace of price increases,” Schmid said Friday. “Some of this has to do with the impact of tariffs on input prices, but it’s not just tariffs — or even primarily tariffs — that have people worried. I’m hearing concerns about rising health care costs and insurance premiums, and I’m hearing a lot about electricity.”

However, Waller said on Monday that slowing hiring was a bigger concern, and renewed his call for interest rate cuts next month.

He added: “The labor market is still weak and approaching a rapid halt.” “Inflation through September continued to show relatively minor effects from tariffs and supports the thesis that tariffs…are not a permanent source of inflation.”

Waller also dismissed concerns — expressed by Schmid and others — that the Fed should keep interest rates high because inflation has exceeded the Fed’s five-year target of 2%. Waller noted that this has not yet led the public to worry that inflation will remain high for a long time.

“You can’t say it’s been above target for five years, so I wouldn’t go lower,” he added. “You have to give us better answers than that.”

There could be a consensus to cut interest rates if, for example, new data for October and November show the economy is shedding jobs, according to Esther George, former president of the Federal Reserve Bank of Kansas City.

It’s also worth noting that many economists were expecting multiple opposition in September, but instead only Stephen Meiran, the conservative appointed by President Donald Trump that month, voted against the decision to cut interest rates, in favor of a larger cut.

“Registering the opposition is a difficult decision, and I think you will find people speaking out today who will not continue to vote in that direction,” she said. “I think you’ll find enough consensus, whichever way they go.”