The Federal Reserve will announce its latest interest rate decision this week. Prior to this, a well-known journalist from The Wall Street Journal, known as the "mouthpiece of the Fed," wrote an article stating that the Fed's rate cut plans are constantly changing, and investors generally expect a third consecutive rate cut this week. After this, officials are prepared to slow down or even halt further cuts. Here are more details from the article.

When leading the Fed to boldly cut rates by 50 basis points at the end of this summer, Fed Chair Powell had to assure some skeptical colleagues that the Fed wouldn't unintentionally signal a crisis. Now, they are facing another potential turning point.

Officials cut rates again by 25 basis points in November, and investors generally expect a third consecutive rate cut this week. Powell is trying to find the right positioning as labor market volatility lessens and inflation appears slightly more robust than in September. Some officials are expressing doubts about continuing rate cuts, and those who strongly supported the previous two cuts are no longer as certain.

One option this week is to cut rates by 25 basis points and then use new economic forecasts to strongly suggest that the central bank is prepared to slow down rate cuts.

Jon Faust said, "Now, both cutting rates and holding steady are reasonable options." He served as a senior advisor to Powell from 2018 until earlier this year. He said officials' views on the trajectory of the Fed funds rate are likely "more important than any decisions they make at the December meeting."

The Federal Reserve funds rate affects borrowing costs across the economy, including mortgage, credit card, and auto loan rates. Raising rates tends to suppress hiring, spending, and investment, while lowering rates stimulates these activities. However, these effects can produce what economists call long-term and variable lag effects, meaning the Fed may not know for a year or more whether their policies are too much or too little.

Have they gone too far or not far enough?

Some officials have stated that they will oppose an interest rate cut this week. These "hawkish" individuals are concerned that the Federal Reserve will allow inflation to remain well above target levels in the fourth or fifth year, thereby wasting the Fed's credibility.

Even though officials still believe that price growth will gradually slow to their target, some officials may have doubts about this prediction due to President-elect Trump's promise to expel workers and impose tariffs after taking office next month. These measures could reverse two developments that have supported officials' optimistic forecasts on inflation: declining commodity prices and slowing wage growth.

Eric Rosengren, who served as president of the Boston Fed from 2007 to 2021, said: "If I were sitting on the committee as a voting member right now, I would oppose an interest rate cut."

They are also concerned that the euphoric state of speculative assets like the stock market and Bitcoin may encourage consumer spending, which could prolong inflation.

Federal Reserve Governor Bowman said in a speech earlier this month, "Given recent economic activity, it is difficult to consider the current level of interest rates as restrictive." Dallas Fed President Lorie Logan warned against excessively cutting rates for mistakenly believing that a more "normal" interest rate would be much lower.

Another group of officials, including Powell, expressed similar concerns, but given that the Federal Reserve has raised interest rates to high levels over the past two years, they believe there is currently no risk of excessive rate cuts.

Powell said last month: "We need to pay attention to the risks of going too far, too fast, as well as the risks of not going far enough. It seems that we are in the position where we need to be."

The labor market remains in a delicate balance. The hiring rate is low, but the layoff rate is also low. In the six months ending in November, the economy averaged an increase of more than 0.14 million jobs, which is a substantial figure. However, the unemployment rate has risen from 3.7% at the beginning of the year to 4.2%. Economic sectors most sensitive to high interest rates, such as the housing sector, have yet to benefit from recent interest rate cuts.

Closed-door car-making.

An important task for Powell is to reach a consensus among a sometimes inflexible committee of 18 other officials. This can be difficult, as inflation has been fluctuating over the past year.

A year ago, after a series of relatively friendly inflation reports, some hawkish officials who had been reluctant to signal an end to interest rate hikes began to change their tune.

In the following months, Powell and his colleagues insisted that they needed a credible entry point to start cutting interest rates. By Labor Day, Powell became increasingly nervous, as he feared that after the central bank’s shame from inflation missteps in 2021, it might keep rates at too high a level for too long.

Then, signs of a possibly sharper than expected slowdown in the labor market began to emerge, with data released in August showing the unemployment rate rising to 4.3%. Inflation resumed its earlier downward trend.

Federal Reserve officials typically prefer to orchestrate major moves without surprising the market. On September 6, the last day before officials began to adhere to the traditional pre-meeting 'quiet period', the speeches of two officials led investors to believe they favored a smaller 25 basis point rate cut.

However, Powell operated behind closed doors, discussing with a smaller circle of advisers, concluding that they should start cutting rates by a larger 50 basis points. This idea drew on the practice of former Fed Chairman Alan Greenspan, who often persuaded colleagues by framing policy choices as a matter of managing different risks.

In this context, the risk of regretting a larger rate cut was considered very low. They had waited too long to cut rates, so that even if the economy grew rapidly, most officials believed they could simply slow down the anticipated cuts. In contrast, if the rate cut was small, but it turned out that the labor market was sharply slowing, this would be a much harder problem to solve.

A lonely dissenter.

Powell usually conducts phone consultations with all 12 regional Fed presidents on the Thursday and Friday a week before meetings and meets with the other six regional Fed presidents based in Washington. Powell and his staff also distribute a series of briefing documents, outlining the rationale for three different policy options.

Some people can start moving forward with little persuasion. Others feel uneasy. In the past, a 50 basis point rate cut also came with greater financial pressure.

Bowman has been warning about the potential risks of more stubborn inflation, and when she saw these policy briefing materials, she knew she could not support Powell's proposal. She ultimately voted against it at the September meeting, marking the first dissent from a Fed governor since 2005.

To avoid multiple dissenters and win support from colleagues who shared Bowman's reservations, Powell convinced them that he could portray the decision in subsequent public speeches as a strong adjustment rather than a panicked move to cut rates.

In the post-meeting press conference, Powell stated, "Nothing... indicates that the committee is eager to complete this work." Instead, he viewed the rate cut as a "good and strong start, showing our determination not to fall behind."

Revisions to government data in the weeks following the meeting showed that income growth and personal savings rates were stronger than initially reported. This alleviated concerns about a potential economic downturn, while also indicating that the Fed may not need to take more drastic measures.

Waller initially favored a smaller rate cut but was later persuaded to support a larger cut, and he recently dismissed questions about whether he regrets that decision. He compared it to buying auto insurance.

"You might ask, 'Why should I buy car insurance? Because I may have an accident,'" he said at an event this month. "If the accident doesn't happen, you may then ask, 'Dude, was buying car insurance a stupid decision?' Of course not."

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