Moving forward in the fog! The Federal Reserve is expected to cut interest rates again this week. Could internal disagreements intensify?

The Fed is expected to cut interest rates for the second time this week to support the precarious job market. However, if they attempt to extend the easing cycle beyond October, they may face renewed opposition from some officials who are still worried about inflation. Many industry insiders believe that although doves within the Fed are currently winning the debate and are likely to push for another rate cut this month, hawks within the policymaking camp may still be concerned about the intensity of the rate cut. The latest CPI data released last Friday showed that core inflation in the US in September hit a three-month low. While this reinforces the Fed's plan to cut rates this week, the overall stagnation in the cooling of prices is not enough to support further rate cuts by the Fed. Nicole Cervi, an economist at Wells Fargo, said, "This data will likely keep the Fed on track to ease in October, but the fundamentals of inflation have not really changed." For the first eight months of this year, Fed policymakers have been on hold, waiting to assess the impact of tariffs and other policy adjustments on the economy. After a significant slowdown in summer hiring, officials decided to cut the benchmark interest rate by 25 basis points in September. In the dot plot released that month, they predicted two more rate cuts by the end of the year. Since the September meeting, the latest US labor market data, partly filled by private data sources to compensate for the government shutdown, has not brought many positive signals. Fed Chair Powell said earlier this month that the labor market had "significantly softened" and that there were "significant downside risks" present. As a result, the interest rate futures market has already priced in expectations for a 25 basis point rate cut this week, another cut in December, and further cuts in March next year. Investors in the $29 trillion US Treasury market have reaped extraordinary returns this year on expectations of continued rate cuts by the Fed, potentially achieving the best annual performance since 2020. The bond market has continued to rise this month on expectations of further rate cuts, up 1.1%. "It will be very difficult to convince the market to abandon pricing in a total of 50 basis points of rate cuts at the next two meetings," said Vishal Khanduja, head of fixed income at Morgan Stanley Investment Management. "It's hard to prove the rationale of deviating from market expectations." Stephen Stanley, chief economist of Santander US Capital Markets, also said, "The financial markets have taken a very aggressive bet, and the Fed leadership has not clearly opposed it." Will internal divisions worsen? However, even though the financial markets seem to have outlined a blueprint for continued rate cuts by the Fed, and Powell appears to be going along with it, this does not mean there won't be dissent within the Fed. Industry insiders say that a group of regional Fed presidents, including St. Louis Fed President Bullard, Kansas City Fed President George and Cleveland Fed President Mester, may raise objections. Rate forecasts released in September showed that out of the 19 Fed policymakers, nine support at most one more rate cut this year, with seven leaning towards no more cuts. These officials do acknowledge the slowdown in hiring and supported the rate cut decision in September. However, they also pointed out that due to a sharp decline in immigration, both labor supply and demand are shrinking simultaneously. This means that the number of new jobs needed to maintain the unemployment rate stable has decreased. Experts estimate that the current breakeven level to maintain stable unemployment is close to the current pace of job growth - an average of 29,000 jobs added per month in the past three months. At the same time, these officials are once again expressing concerns about inflation. While tariffs have not caused the level of price increases that many expected, Trump's ongoing announcements of new tariff measures have raised concerns that tariff impacts may be more prolonged. In addition, recent evidence suggests that price pressures are accumulating directly outside the regions affected by tariffs. Loretta Mester, the new president of the Philadelphia Fed who will gain FOMC voting rights next year, has already expressed concerns about soaring prices in the services sector this month. Data shows that non-housing core services inflation fell at the start of 2025 but has risen by over 3% year on year for the past four months. Several officials have noted that inflation has exceeded the Fed's 2% target for four years in a row and is not expected to return to the target range until 2028. The long period of being "over target" could significantly increase the risk of rising long-term inflation expectations - a development significant enough to alert policymakers. Anna Paulson, the new president of the Federal Reserve Bank of Philadelphia, emphasized in her inaugural policy speech this month, "The stability of long-term inflation expectations is the key touchstone of the credibility of monetary policy. Successfully achieving the task of lowering inflation - returning the inflation rate to 2% - is crucial." Even Lael Brainard, a Fed policy dove who first warned of the hiring slowdown this summer, has recently cautioned against rate cuts due to the contradictions between strong growth and a weak labor market. Brainard said in a speech earlier this month, "One of two things must change - either economic growth slows to match the weak labor market, or the labor market recovers to match stronger economic growth." In any case, the lack of official data during the government shutdown may make Fed officials' policy judgments more opaque. This background suggests that the Fed will likely maintain its course from September this month, but it is unlikely that they will send a clear dovish signal. Veronica Clark, an economist at Citigroup, pointed out that this could mean they will follow the established policy path set in the September rate forecast - two more rate cuts this year and one cut in 2026. "There is still a lot of divergence, but there is not yet enough evidence to truly influence decision-making," Clark said. "This could be one of the main signals - the lack of clarity leading to a difficulty for policymakers to accurately predict the future direction."