Powell Moves Towards Rate Cut Despite Federal Reserve Division

SadaNews Economy - Federal Reserve Chairman Jerome Powell is expected to advocate for a new quarter-point interest rate cut this week, despite growing concerns among several policymakers about inflation remaining at elevated levels.

The Federal Reserve lowered interest rates for the second consecutive time in October, driven by a surprising downturn in the U.S. job market during the summer. However, this was followed by a wave of "hawkish" concerns expressed by some officials, including five members who have voting rights on monetary policy this year, indicating hesitation or unwillingness to support a third rate cut in December.

This increasing division has been exacerbated by a lack of recent economic data due to the government shutdown that extended through most of October and November. Moreover, the latest inflation figure that monetary policymakers reviewed, issued on December 5, dates back to September, which is unlikely to change the ongoing discussion regarding monetary policy.

Amidst this backdrop, investors showed serious doubts for about a week in mid-November regarding the likelihood of an additional cut. However, much of this unusual debate was resolved on November 21 when New York Fed President John Williams, viewed as a close ally of Powell, stated that he sees room for a "near-term" cut. The market took this signal and now sees a rate cut next week with a probability exceeding 90%.

Economists surveyed by Bloomberg expect the "Fed" to take a pause before implementing two additional cuts in 2026, in March and September. There is some hope that the influx of new data - as statistical agencies catch up with delays caused by the shutdown - will help resolve the ongoing tension between the Fed's dual mandates: containing inflation and maximizing employment.

However, new drama looms on the horizon. President Donald Trump is expected to announce a successor to Powell soon since his term ends in May. Kevin Hassett, a close ally of Trump and one of his senior economic advisors, is considered the front-runner. This has raised concerns among some investors that the next Fed chairman may steer towards a rate cut under Trump’s direction, which could ignite inflation.

Bloomberg Economics experts' opinion: "If Powell leans towards a more hawkish tone in the press conference to appease the hawkish regional bank presidents, will it make a difference at this stage? After all, the next Fed chair - Hassett is the front-runner - could join the board in February, which practically places Powell in a limited influence position during the last months of his presidency."

In contrast, the Bank of Canada is expected to keep the interest rate unchanged at 2.25%. Officials stated that this level is "approximately appropriate" as long as economic expectations and inflation forecasts align with estimates.

Although third-quarter growth significantly exceeded expectations, it was largely driven by a decrease in imports and a surge in military spending, while household consumption declined. Inflation is nearing the target level at 2.2%, despite core indicators remaining elevated.

On another note, decisions from central banks in Australia, Switzerland, and Brazil will draw market attention, and Eurozone finance ministers are set to elect a new president.