Fed's Waller Champions Rate Cuts, Clashing With Powell's Cautious Tone
A divergence in monetary policy views is creating market uncertainty after the Fed's latest rate cut, with Chair Powell citing 'strongly different views' on the path forward.
An emerging divergence within the Federal Reserve is casting uncertainty on the future of U.S. monetary policy, as influential Governor Christopher Waller advocates for continued interest rate cuts, a stance that appears at odds with Chair Jerome Powell’s more cautious public tone.
While the central bank delivered a widely expected quarter-point rate reduction at its October 29 meeting, setting the new benchmark rate between 3.75% and 4.00%, it was the conflicting signals from its leadership that captured the market's attention. The move, which was the second cut of the year, came after Waller had publicly championed the decision.
In a speech just weeks before the meeting, Governor Waller made a case for the 25-basis-point cut, pointing to a “softening labor market” as a key justification. His analysis suggested that weakening payroll gains and other employment metrics warranted a more accommodative policy to sustain the economic expansion.
However, any investor optimism for a clear path to further easing was short-lived. In his post-meeting press conference, Chair Powell struck a decidedly more hesitant and less dovish tone. He stressed that a potential rate cut in December was “far from a done deal” and emphasized there were “strongly different views” among policymakers, signaling a deeply divided committee.
Powell highlighted the complex environment facing the Fed, complicated by a recent government shutdown that has delayed crucial economic data. He characterized the situation as navigating through uncertainty, asking rhetorically, “What do you do if you are driving in the fog? You slow down!” This analogy was interpreted by markets as a signal for a potential pause in the easing cycle.
The market's reaction reflected this whiplash of messaging. U.S. stocks, which saw modest gains immediately following the rate cut announcement, pared their advances during Powell's commentary. Concurrently, Treasury yields rose and the dollar strengthened as traders recalibrated their expectations for a December cut, pricing in a higher probability that the Fed would remain on hold.
This public divergence between a prominent governor and the chair places immense weight on the next batch of inflation and employment data. As the Fed approaches its final meeting of the year, investors will be watching closely to see whether Waller's push for proactive easing gains traction or if Powell's cautious, data-dependent approach prevails in an increasingly uncertain economic climate.