Unprecedented! Fed's Hawk-Dove Debate Intensifies

Capital Economics recently stated that the U.S. Federal Reserve, which has always been consensus-oriented, is seeing growing internal divisions, potentially leading to a deadlock in next month's interest rate decision.

Following two interest rate cuts, recent comments from Fed policymakers have leaned increasingly hawkish. As inflation remains persistently above the Fed's target, hopes for further policy easing at the December 9-10 meeting have diminished.

The September jobs report from the U.S. Labor Department (delayed due to the government shutdown), released last Thursday, also failed to resolve the internal divisions at the Fed. The mixed report showed that September job growth exceeded expectations, but data from previous months were revised downward, and the September unemployment rate rose to its highest level in four years.

However, remarks from the Fed's "third-in-command," New York Fed President John Williams, last Friday shifted the landscape. He stated that he believes "there is still room for further rate cuts in the near term" to bring the benchmark rate closer to a neutral level.

As a result, the probability of a December rate cut surged sharply: rising from less than 40% the previous day to over 70%. The three major U.S. stock indices collectively rebounded last Friday, reversing the significant declines seen the previous day.

The Fed's interest rate decisions are determined by votes from the 12-member Federal Open Market Committee (FOMC). According to the rules, a simple majority is required for approval, meaning at least 7 votes in favor. These 12 voting members include the 7 members of the Federal Reserve Board of Governors, the President of the New York Fed, and 4 rotating regional Fed presidents.