Fed Minutes Reveal Deep Divisions on December Rate Cut
Policymakers show growing hesitation on further easing, causing markets to slash bets on a year-end interest rate reduction and brace for a data-dependent decision.
Federal Reserve officials are showing clear hesitation about committing to an interest rate cut in December, with newly released minutes from their October meeting revealing deep divisions on the path for monetary policy. The summary, published Wednesday, signals a significant departure from what markets had perceived as a steady march toward further easing, forcing investors to re-evaluate the likelihood of a year-end rate reduction.
The minutes from the October 28-29 meeting showed that while officials ultimately voted to lower rates by a quarter point, there were "strongly differing views" on future actions. Some policymakers expressed concern over a cooling labor market and slowing job gains, while others remained focused on inflation that is still stubbornly above the central bank's 2% target. This internal debate injects a new layer of uncertainty into the Fed's final meeting of the year.
Following the release, market expectations for a December cut, which stood near 70% just a week ago, have fallen sharply. CME Group's FedWatch Tool now indicates roughly a 50% probability of another cut, effectively a "toss-up," as investors digest a more cautious central bank.
"A December rate reduction is not a foregone conclusion," Fed Chair Jerome Powell had stated in his post-meeting press conference, a sentiment that the minutes now confirm was widely shared among his colleagues. This has created a more data-dependent outlook, with Richmond Fed President Thomas Barkin emphasizing that upcoming reports on inflation and employment will be critical guides for the December decision, according to Morningstar.
The market's reaction to the hawkish tilt was nuanced. US stocks initially stumbled before recovering to end the day in positive territory. The S&P 500 rose 0.73% to 6,665.84, while the tech-heavy Nasdaq Composite gained 1.22%. In the bond market, the benchmark 10-year U.S. Treasury yield edged higher to 4.125%, reflecting expectations that rates may stay higher for longer. The U.S. Dollar Index also strengthened by 0.20% on the news.
Some analysts see the public nature of the disagreement as a potential risk. Krishna Guha of Evercore ISI noted the deepening divisions could lead to a "crisis of governance" within the Fed, potentially making the institution more reactive to short-term data swings. The Washington Post reported that such divisions have not been this pronounced in years.
Despite the prevailing uncertainty, not all analysts are convinced the Fed will stand pat. Economists at Goldman Sachs are maintaining their forecast for a 25-basis-point cut in December, projecting that cooling employment figures will ultimately justify further action. However, the minutes make it clear that the bar for such a move may be higher than previously thought.
Investors now turn their attention to the final stretch of economic data before the Fed's December 10-11 meeting. With policymakers themselves divided, the upcoming reports on consumer prices and the labor market will be scrutinized more intensely than ever for any sign that could tip the scales for or against another cut.