Several core allies of Fed Chair Powell have recently voiced support intensively for another rate cut in December, arguing that the risks facing the labor market now outweigh those of inflation. This series of statements has rapidly fueled market expectations for Fed easing.

The latest comments came from San Francisco Fed President Mary Daly and Fed Governor Christopher Waller. On Monday, Daly warned of the risk of a "nonlinear" deterioration in the labor market, while Waller also publicly supported a December rate cut. Their views echo the dovish stance of New York Fed President John Williams last week, who emphasized the need to avoid imposing "unnecessary risks" on the job market.

In response, the market reacted swiftly. Traders in the interest rate swap market now estimate the probability of a 25-basis-point rate cut at the Fed's December meeting has soared to 80%, up from about 40% a week ago. U.S. Treasury bonds rose for the third consecutive trading session. The yield on the more policy-sensitive two-year Treasury fell sharply over the past two trading days, while the ten-year Treasury yield dropped to its lowest point this month.

The complexity of this decision-making outlook lies in the fact that, due to data release delays caused by the government shutdown, the Fed will not have access to the key October and November employment reports when it meets on December 10th. This forces officials to make judgments with incomplete information, increasing the uncertainty of the decision.

Powell Allies Speak Out Intensively, Labor Market Risks in Focus

Several of the most influential officials within the Fed have shifted the focus of the policy debate to the labor market.

San Francisco Fed President Mary Daly explicitly stated in a media interview that she supports a rate cut because managing a sudden deterioration in the job market is more difficult than dealing with an inflation rebound. She warned that the labor market has become "very fragile" and faces the risk of "nonlinear changes." Notably, according to "the new Fed wire" Nick Timiraos, Daly's public views rarely deviate from Powell's stance.

Daly's views echoed those expressed by New York Fed President John Williams last week. As the Fed's "third-in-command," Williams said last Friday that downside risks to employment have increased as the labor market cools, while upside risks to inflation have eased, so the Fed still has room for further rate cuts in the "near term."

Similarly, Fed Governor Christopher Waller also expressed support on Monday for a rate cut in December and for adopting a more flexible policy starting in 2026.

These officials believe that although the inflation rate remains around 3%, above the 2% target, the cost pressures from tariffs have been milder than expected. Williams pointed out that there is no evidence tariffs have triggered secondary effects or other price spillovers. Therefore, preventing the risk of a sharp weakening in the labor market has become a priority.

Committee Divisions Highlighted, December Decision Becomes a "Test of Judgment"

Although dovish voices are growing stronger, significant divisions remain within the Fed committee. Boston Fed President Susan Collins expressed a more cautious view. She believes the current "moderate or modestly restrictive" policy stance remains appropriate because resilient demand may continue to exert upward pressure on inflation. She stated she would proceed cautiously at the next meeting.

Regarding the internal differing opinions, Daly sees it as reflecting real-world uncertainty rather than "groupthink." She described next month's decision as a "test of judgment," weighing the "risk of not acting" against the "risk of acting." She stated that she views the risk of acting (cutting rates) as lower, and the risk of not acting as higher.

When asked whether cutting rates too early might limit future policy space, Daly directly responded that the Fed should not be hamstrung by this. She emphasized that the Fed should keep its options open, whether further rate cuts or hikes are needed in the future. Against this backdrop, Chair Powell will play a key role in reconciling internal differences at the December 9-10 meeting.

Market Reacts Swiftly, Rate Cut Bets Heat Up

Driven by the dovish remarks from Fed officials, financial markets quickly repriced the policy path. According to Bloomberg, the rate on overnight index swaps (OIS) linked to the December meeting fell sharply, with market pricing now reflecting an 80% probability of a 25-basis-point cut.

The U.S. Treasury market responded positively. The benchmark ten-year Treasury yield fell 3 basis points at one point to 4.03%, a new low for the month. Andrew Brenner, Vice President of Natalliance Securities, wrote in a report that despite the absence of key jobs data, "investors took comfort from the fact that senior Fed members still want to ease in December."

Beyond rate cut expectations, some technical factors also supported the bond market. Bloomberg reported that the market expects Friday's monthly index rebalancing to prompt large funds to buy long-duration bonds. Meanwhile, Monday's auction of $69 billion in two-year Treasuries saw strong demand, with a bid-to-cover ratio hitting a three-month high.

John Canavan, Chief Analyst at Oxford Economics, noted that "the improved tone at the front-end of the yield curve over the past few trading sessions" helped the auction go smoothly. This week will also see auctions of $70 billion in five-year and $44 billion in seven-year Treasuries.