Fed chair Powell's allies provide opening for December rate cut

A divided committee, missing data and a whiff of stagflation leave Powell with hard choices

- Nick Timiraos

Allies of Federal Reserve Chair Jerome Powell have laid the groundwork for him to push a rate cut through a divided committee at next month’s meeting even though it could draw multiple dissents.

The unusual level of division inside the Fed means that, to an even greater degree than usual, the final call rests with Powell.

To negotiate these stark divisions, Powell is likely to weigh two approaches, each with drawbacks. The first: cut rates, as markets now expect, and use the exquisitely negotiated postmeeting statement to signal a higher bar for further reductions. This “cut then hold” approach would mirror what Powell did in late 2019 when, like now, three cuts met meaningful resistance from his colleagues.

This option would also likely trigger objections from officials who don’t support any cut. But it could end the soap opera of officials airing their disagreements in public by stitching together a new consensus that further cuts aren't warranted if recent conditions persist.

The alternative is to hold rates steady and reassess in January, when officials will have more of the employment and inflation data that was suspended by a federal government shutdown. But that approach could prolong the public discord for another seven weeks, with no guarantee the additional data will resolve the underlying disagreements.

The divide reflects economic crosscurrents that have split the committee more than at any point in Powell’s nearly eight-year tenure: Job growth is stagnating but inflation is uncomfortably elevated, which carries a whiff of what economists call stagflation.