Needle point against wheat ear: The internal division of the Federal Reserve in 2025, 2026 may be even more exciting

Over the past year, the Federal Reserve found itself in a rare contradictory situation as it worked towards achieving the dual mandate authorized by Congress - maximizing employment and price stability - since the stagflation period of the 1970s. This situation led to deep internal divisions within the Federal Reserve, with the most direct manifestation being the opposing views among the members on interest rate policies. This divergence is expected to continue until 2026. Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, pointed out that Fed Chairman Powell successfully bridged the internal consensus gap within the central bank this year, leading to three interest rate cuts. However, if future inflation remains high while the job market continues to stagnate, the new chairman may find it more difficult to build consensus. Luzzetti said, "While the most likely policy path going forward is further rate cuts, we should also be wary of a risk scenario: the next chairman may ultimately face a committee considering raising rates." Ian Wyatt, Chief Economist at Huntington Bank, added, "In such an environment, it will be a daunting task for the new chairman to reconcile various opinions and push for policy consensus. Especially when the new chairman's policy position is severely disconnected from the views of the majority of the committee, the difficulty will increase further." Growing influence of Trump In early 2025, the Trump administration introduced a series of intensive economic policy adjustments, from frequent changes in tariff rates to tightening border controls to limit immigration inflows. These measures kept the Federal Reserve in a policy stalemate for most of the year. Officials had to spend a lot of effort evaluating the potential impact of these policies on economic growth, inflation levels, and the job market. The Federal Reserve's stagnant attitude towards these policies has left Trump dissatisfied. On one hand, he continued to pressure the Fed to cut rates, while on the other hand, he criticized Powell on procedural details, attempting to remove him from office. Trump's move to threaten Powell's dismissal due to policy differences raised concerns about damage to the central bank's independence, causing significant volatility in financial markets. Although Trump ultimately did not dismiss Powell, he did remove Federal Reserve Board member Lisa Cook on allegations of mortgage fraud - the case is currently under judicial review, with the U.S. Supreme Court scheduled to hear it early next year. Meanwhile, Federal Reserve Board member Adrienne Kuegler stepped down in the summer of this year. Trump then appointed Stephen Milne, Chairman of the White House Economic Advisory Committee, to fill the remaining 5 months of her term. It is worth noting that Milne did not resign from his position at the White House, only completing temporary leave formalities. This move has raised concerns among many Fed observers that it could jeopardize the Fed's independence - and Milne himself had warned of such risks before joining the government. Tariff impacts and weak job market Initially, most Federal Reserve officials believed that the impact of tariffs would only lead to one-time price increases and not evolve into long-term inflation pressures. However, with the arrival of "Liberation Day" on April 2nd, the Trump administration introduced the most extensive and comprehensive tariff policy in a century. More and more Fed officials began to worry that tariffs could lead to sustained inflation problems. As a result, the Fed spent the entire summer closely monitoring and evaluating the actual impact of tariff policies. By July, signs of cooling in the U.S. labor market had emerged. The Federal Reserve held a monetary policy meeting and decided to keep rates unchanged - its consistent policy stance throughout the year. However, this decision was met with opposition from Federal Reserve Board members Christopher Waller and Michelle Bowman, who both argued for interest rate cuts as a precautionary measure to cushion the weak job market. This dissent clearly exposed deep internal divisions within the Federal Reserve: members had vastly different assessments of the stickiness of inflation and to what extent policy-making should address the issue of weak employment. By the end of summer, job market data revealed more serious issues than expected. This prompted Powell to lay the groundwork for interest rate cuts in September. This rate cut set the stage for three successive rate cuts in the fall, mirroring the policy rhythm of 2024. In the fall of the same year, the United States also experienced the longest government shutdown in history. Due to the lack of official economic data, the Fed found itself in a "flying blind" situation when making key rate decisions. Officials had to rely on data from private sectors, but such data, while relatively comprehensive in the job market, had limited value in terms of inflation and price areas. By December, the rift within the Federal Reserve had become fully open. Although the Fed completed its third rate cut of the year, two voting members - Chicago Fed President Austin Goolsbee and Kansas City Fed President Jeff Schmidt - clearly expressed opposition. Both were concerned about inflation and advocated keeping rates unchanged. At the same time, Board member Milne also voted against, but he favored larger rate cuts, a one-time cut of 50 basis points. In addition, six non-voting members also stated that they did not support the rate cut that month. Although markets were discussing the inflation risks caused by tariffs, the actual impact of tariffs on inflation was lower than expected this year. Some Fed officials, including Powell and Waller, believed that the inflation pressure from tariffs would peak in the first quarter of next year and then gradually decline. However, Cleveland Fed President Beth Hammer and Dallas Fed President Lori Logan, both voting members of the Fed in 2026, held different views - they were concerned that inflation stickiness might exceed expectations and high inflation could persist for a longer period. 2026: Cautious policy-making Against the backdrop of completing three so-called "preventive rate cuts" and inflation levels still not falling within the target range, the Federal Open Market Committee has clearly signaled that it will reserve sufficient time to observe and assess the economic situation before considering further rate cuts. Although long-delayed economic data is gradually being released, the current economic picture remains unclear due to the distortion of statistics caused by the government shutdown. The inability to accurately grasp the current economic fundamentals has further compounded the difficulty of predicting Fed policy and taking precise actions. The latest inflation report in November showed a significant narrowing of overall price increases as rental prices fell and were included in the statistics. However, due to the gap in data caused by the government shutdown, many market participants were skeptical about the accuracy of this report. John Williams, President of the New York Fed, believes that the latest inflation data based on the Consumer Price Index (CPI) underestimates the actual inflation level by 0.1 percentage points; while Hammer believes that the underestimation could reach 0.2 to 0.3 percentage points. At the same time, the U.S. unemployment rate has slightly risen to 4.6%. Looking ahead to 2026, Fed officials expect to implement only one more rate cut next year. Even though the job market continues to cool down, officials believe that this sluggish trend has not reached the level that demands urgent action. At the same time, the inflation rate remains above the 2% policy target. Officials anticipate that with the fiscal stimulus from the tax bill and the economic rebound after the end of the government shutdown, U.S. economic growth will pick up in 2026. Jeffrey Roach, Chief Economist at LPL Financial, said that inflation data could fluctuate in the coming months, but inflation levels are expected to trend lower throughout 2026, providing room for further rate cuts. He stated, "In early 2026, with unexpectedly large tax refunds boosting consumer demand, inflation data may spike several times, but it is expected to return to a cooling trend in the second half of next year." Former Kansas City Fed President Esther George predicted that the unemployment rate would stabilize next year (although at a higher level), and given the large-scale fiscal deficit spending, lingering doubts about Fed independence, and loose financial conditions, inflation will remain high. George said, "Affected by the interruption of official data releases, the FOMC's policy actions in 2026 may tend to be cautious but still leaning towards rate cuts. The policy logic is that these rate cuts are aimed at returning policy rates to a neutral level." In addition, 2026 will see the first change in Fed chairmanship in eight years. It is widely expected that the president will nominate a candidate who favors low-rate policies as the new chairman. However, if inflation rates remain high, the new chairman may still face challenges in pushing for rate cut consensus. Cleveland Fed President Hammer has already made it clear - as a voting member in 2026, she advocates maintaining rates unchanged before spring next year. Wilmer Stith, Bond Portfolio Manager at Wilmington Trust, predicts that internal divisions within the Fed will continue in 2026. If the new chairman tries to force rate cuts while other committee members clearly oppose, the probability of dissenting voices at meetings may further increase. He also predicts that the Trump administration will continue to pressure the Fed to implement lower rate policies. However, Powell's chairmanship will continue until May next year. Stith pointed out that due to this factor, the number of rate cuts in the first half of 2026 may be very limited, with only one rate cut expected from January to May. Stith said, "I believe that once the new chairman takes office, the number of rate cuts for the whole year may reach two to three times. In the future, the Fed may have closer ties to the government's policy stance for a long time. In this regard, rate cuts are already on the horizon."