Fed divisions reveal new caution over continued cuts

Federal Reserve Chair Jerome Powell delivered a blunt message for investors who have assumed the central bank would be on cruise control toward a third rate cut in December: Not so fast.

- Nick Timiraos

Rather than hide behind cryptic and vague language that central bankers often deploy, Powell went out of his way Wednesday to play up divisions on the rate-setting committee and play down the idea that a rate cut in six weeks is a foregone conclusion.

“In fact, far from it,” he said at one point.

Powell’s plain speaking reflected deepening divisions at the Fed over how to interpret an economy where consumer spending remains robust but hiring has slowed sharply.

What the Fed will do next depends on which of two competing economic narratives proves more accurate. In one, the AI investment boom and stock market rally will continue powering business and consumer spending, limiting the need for significantly lower rates and risking inflation that settles closer to 3% than the Fed's 2% goal if the Fed cuts too much.

In the other, the effects of higher interest rates combined with changes in trade and immigration policies finally catch up to the labor market, pushing unemployment higher if the Fed stops cutting. Payroll growth has slowed this summer, and Powell said Wednesday that by some measures, job creation is close to zero.

“They're in a weird situation because the spending data doesn’t seem to align very well with the labor market data,” said William English, a former senior Fed adviser. “The spending data seems OK, but on the other hand, the labor market shows this really sharp slowdown.”

After cutting rates by a full percentage point last year, the Fed has added another half-point of cuts this year, leaving rates closer to the range many consider neutral, neither stimulating nor restraining the economy.