Fed Chairman Powell stated in public on Wednesday (4th) that considering the U.S. economy is performing stronger than it was when rate cuts began in September, policymakers may be more cautious about further rate cuts. Meanwhile, he reiterated that the Fed's independence will be protected, and the expected impact of Trump's tariff policies is unlikely to affect monetary policy decisions temporarily.
Rate futures pricing shows that a rate cut in December is nearing full pricing again.
Powell 'plays Tai Chi'
As the last appearance before the Fed's blackout period ahead of the December meeting, Powell stated at a media event he attended that 'we can be more cautious as we try to find the neutral rate.'
Since the results of the U.S. election were announced in early November, the outlook for broader economic uncertainty has increased, progress against inflation has stalled, and there is evidence that the job market has avoided a concerning persistent decline, leading to adjustments in forecasts of the Fed's policy space.
Regarding the current economic situation, Powell stated that the inflation target has not been met, but progress is still being made. Regarding the other part of the dual mandate, which is also the focus of current policy, he believes that the U.S. job market is in good shape.
The Fed chairman indicated that over time, although the downside risks of (interest rates) are lower than previously expected, the Fed can remain patient and cautiously move toward the neutral rate. Powell's remarks largely echoed his statements from mid-November when he indicated that the Fed could consider rate cuts patiently without rushing.
The independence of the Federal Reserve has drawn widespread attention, with reports suggesting that Trump may attempt to manipulate monetary policy through legislation, or even by establishing a 'shadow chairman' that could potentially undermine Powell's authority.
In this regard, Powell stated that there are safeguards in the congressional legislation that created the Federal Reserve, which will help protect the Fed from political influence.
Regarding the impact of the new government's tariff policies that are of concern to the outside world, Powell responded that the Fed cannot formulate corresponding policies because it does not know the scale of Trump's tariffs, when they will be implemented, and how long they will last. He also emphasized that U.S. debt is on an unsustainable path.
There are divisions within the Federal Reserve.
Reporters from Yicai found that similar to Powell, although several Fed officials acknowledge that future policy rates will gradually decline, they are reluctant to provide clear policy signals and are open to options.
Earlier on Wednesday, St. Louis Fed President Bullard said, 'I am keeping all options open.' He added that he would look at upcoming data before deciding whether another rate cut is needed in two weeks. Richmond Fed President Barkin stated that he believes inflation and employment are moving in the right direction, but he would not pre-judge the outcome due to more data being available before the meeting.
As an ally of Powell, New York Fed President Williams' views are worth noting. He believes that as inflation pressures continue to cool, the Fed may further lower the rate target over time. 'Monetary policy remains in restrictive territory to support inflation sustainably returning to the 2% target.' Williams added, 'The path of policy will depend on the data. If we have learned anything in the past five years, it is that the outlook remains very uncertain.'
In contrast, only Fed Governor Waller and Minneapolis Fed President Kashkari expressed a clear stance. Waller stated that as inflation is still expected to fall to 2%, he leans toward supporting another rate cut this month. 'The policy remains sufficiently restrictive, so further rate cuts at our next meeting will not significantly change the stance of monetary policy and provide ample room to slow down the pace of rate cuts later if necessary to maintain our progress toward the inflation target.'
Boris Schlossberg, a macro strategist at BK Asset Management, stated in an interview with Yicai that inflation progress has stalled in recent months, while the economy remains strong. Consumption has largely been supported by healthy labor demand, and household savings remain high. This year's holiday shopping season looks quite promising, and he expects inflation to continue rising, posing significant challenges for the Fed's next steps toward easing given the strong consumer demand and sticky service inflation.
Notably, several economic data released on Wednesday showed slight fluctuations. The Institute for Supply Management (ISM) reported that as demand and employment growth slowed, its services activity purchasing managers' index fell from 56.0 in October to 52.1 in November, marking its first decline since June, which may indicate that the economy's biggest pillar is losing momentum.
ISM Chairman Steve Miller stated that all four major indicators that make up the index contributed to this decline — weak business activity, new orders and employment, and reduced supplier delivery times. 'It's no surprise that people often mention the election results and tariffs, and are cautious about the potential impact on specific industries.'
The monthly job growth in the private sector has slowed. The ADP report showed an addition of 146,000 jobs in November, down from the downwardly revised 184,000 in October. 'Strong hiring by large employers led the growth this month, but industry performance was mixed,' said ADP Chief Economist Nela Richardson, adding, 'Manufacturing has been the weakest since spring. Financial services, leisure, and hospitality have also performed poorly.'
Due to the often weak correlation between ADP and government employment data, the market's focus has shifted to the non-farm payroll report for November, which will be released on Friday (6th). Wall Street expects that as the impacts of hurricanes and strikes diminish, the number of new jobs added last month is likely to rise sharply from 12,000 to around 200,000, with the unemployment rate holding steady at 4.1% and monthly wage growth expected at 0.3%, which is likely to further solidify a stable employment foundation.
The federal funds futures show that investors expect a 75% probability of a 25 basis point rate cut in December, but the Federal Reserve is likely to choose to pause rate cuts in January.
Schlossberg told Yicai that he believes the Fed will cut rates by 25 basis points in December. The current situation is somewhat similar to September, where the overall economy remains solid, some indicators are showing weakness, and Trump will be sworn in as president before the January meeting, prompting the FOMC to potentially act in advance to guard against potential risks. On the other hand, doing so can also provide greater policy space for the next meeting, such as whether to pause to assess the new government's policy impact.
