FOMC Statement Analysis: Discrepancies in The Federal Reserve's Interest Rate Cuts, December Rate Adjustment Path Remains a Mystery

On October 29, the Federal Reserve (FED) concluded its two-day FOMC monetary policy meeting and announced a 25 basis point rate cut. The latest policy statement indicates that two voting members disagreed with the 25 basis point cut, suggesting uncertainty about whether to continue cutting rates in December. Commissioner Milan advocated for a 50 basis point cut, while Commissioner Schmidt argued against any rate cut; such a three-way split is extremely rare in FOMC history.

Unprecedented Triangular Divergence: Significant Discrepancy in Rate Cuts

The committee members who voted in favor of this monetary policy action include: Chairman Jerome H. Powell, Vice Chairman John C. Williams, Michael S. Barr, Michelle W. Bowman, Susan M. Collins, Lisa D. Cook, Austan D. Goolsbee, Philip N. Jefferson, Alberto G. Musalem, and Christopher J. Waller.

The committee members voting against this action are: Stephen I. Miran and Jeffrey R. Schmid. Among them, Miran argued for a 50 basis point reduction in the federal funds rate target range at this meeting; Schmid argued that no adjustments should be made to the federal funds rate target range at this meeting.

This kind of three-way divergence is extremely rare in the history of the FOMC. Typically, opposing votes either advocate for a more aggressive rate cut or call for a pause in rate cuts, but it is very rare to see two opposing viewpoints at the same time. Milan's 50 basis point proposal indicates that he believes the downside risks facing the economy are more severe and require greater stimulus. Schmidt's zero rate cut stance suggests that he is concerned that inflation is not yet fully under control and that cutting rates too early could trigger a rebound in inflation.

This divergence adds significant uncertainty to the December FOMC meeting. Powell stated at the post-meeting press conference that a further rate cut at the December meeting is “far from certain,” and revealed that Federal Reserve officials hold “significantly different views” on whether another rate cut should occur in December. This internal divergence indicates that the Federal Reserve is facing a difficult policy choice; on one hand, a weak labor market requires accommodative policies for support, while on the other hand, persistent inflationary pressures limit the scope for rate cuts.

Interpretation of Significant Changes in FOMC Statement Wording

(Source: FOMC)

Compared to the statement in September, the October FOMC statement has significant changes in several key areas. The most notable shift is the economic assessment changing from “economic slowdown” to “economic activity is expanding at a moderate pace.” This change in wording suggests that the Federal Reserve (FED) has become relatively optimistic in its assessment of the economic outlook, believing that the economy is not slowing down as rapidly as previously feared.

In the employment sector, the statement pointed out that “since the beginning of this year, job growth has slowed, and although the unemployment rate has slightly risen, it remains low as of August.” More importantly, the newly added statement: “Recent additional indicators are also consistent with the above trend.” This indicates that the Federal Reserve (FED) is not only focusing on a single data point but is also comprehensively assessing multiple employment indicators, confirming that the job market is cooling down but has not yet collapsed.

In terms of inflation, the statement maintains that “inflation levels have risen since earlier this year and are currently still in a slightly elevated range.” This wording indicates that while inflation has improved, it is still away from the 2% target, which is also an important reason for Schmid's opposition to interest rate cuts.

FOMC Statement Key Wording Changes:

Economic Assessment: From “economic slowdown” → “moderate speed expansion” (relatively optimistic)

Employment Risks: The new “downside risks in the employment sector have increased” (paying more attention to employment)

Risk Balancing: From focusing solely on inflation → “Two-Way Risk” (Balancing Dual Mandate)

Reason for Rate Cut: Added “In light of the changes in the risk balance situation” (Basis for policy shift)

The committee closely monitors the two-way risks facing its dual mandate and assesses that “the downside risks in the labor market have increased in recent months.” This is one of the most significant new additions to this statement, indicating that the Federal Reserve's policy focus is shifting from combating inflation to preventing an excessive cooling of the labor market. This shift in policy focus provides a theoretical basis for the Federal Reserve to cut interest rates.

End of tapering and release of liquidity signals on December 1

The committee decided to end its total securities holdings reduction plan on December 1, which is another significant decision from this FOMC statement. Quantitative tightening is the operation by the Federal Reserve (FED) to withdraw liquidity by reducing the size of its balance sheet, and ending quantitative tightening means that the Federal Reserve (FED) will no longer actively withdraw liquidity from the market.

Powell stated that due to the recent increase in repo rates and financing costs, this step must be taken. His statement indicates that the Federal Reserve (FED) has ended its quantitative tightening policy, but it is unlikely to further expand its balance sheet or restart quantitative easing. This “ending tightening but not further easing” neutral stance has left the market feeling confused.

For cryptocurrencies and risk assets, the end of tapering should have been a positive signal, as it halts the withdrawal of liquidity. However, the market reaction has been negative, with Bitcoin dropping 1.49% to $111,237 after Powell's speech, and Ethereum falling 1.07% to $3,937. The reason for this contradictory reaction lies in the market's greater concern about whether the Federal Reserve (FED) will further cut interest rates, rather than whether it will stop tapering. Ending tapering only stops the withdrawal of liquidity and does not equate to actively injecting liquidity.

The committee is firmly committed to taking measures to support maximum employment and to promote the return of the inflation rate to the target level of 2%. This dual commitment shows that The Federal Reserve (FED) is working to balance two policy objectives, but this balance is extremely difficult in a situation where inflation is not yet fully under control.

December Rate Cut Outlook: Uncertainty Dominates the Market

To support the above objectives, and in light of changes in the risk balance situation, the committee decided to lower the target range for the federal funds rate by 25 basis points to 3.75% - 4%. This is the second rate cut following the 50 basis point reduction in September, but the cut has been reduced from 50 basis points to 25 basis points, indicating that the Federal Reserve's pace of rate cuts is slowing.

When considering further adjustments to the target range for the federal funds rate, the committee will carefully assess the latest economic data, the evolving economic outlook, and the balance of risks. This vague statement leaves ample flexibility for the policy decision in December, but also brings uncertainty to the market.

Key Factors Influencing the December Rate Cut Decision:

Employment Data: If the unemployment rate continues to rise, it will increase the pressure to lower interest rates.

Inflation Data: If inflation rebounds, it will limit the room for interest rate cuts.

Economic Growth: If GDP growth slows down, it will support interest rate cuts.

Financial Market Stability: If the market experiences turbulence, it may prompt a rate cut.

International Economic Situation: Sino-US trade negotiations, geopolitical risks, etc.

Powell warned at the post-meeting press conference that rising tariffs are putting pressure on prices, creating a difficult balancing act for the central bank. President Trump announced a 100% tariff on Chinese imports, a trade policy that could drive up inflation and limit the Federal Reserve's room to cut interest rates. If inflation rebounds due to rising tariffs, the Federal Reserve may be forced to pause rate cuts or even consider raising rates.

When assessing the appropriate monetary policy stance, the committee will continuously monitor the impact of various latest information on the economic outlook. If risks arise that could hinder the committee's ability to achieve its policy objectives, the committee will be prepared to adjust the monetary policy stance. This statement demonstrates that The Federal Reserve (FED) maintains a high degree of flexibility, and the policy path will be entirely dependent on data performance.

The market currently has severe divergence in expectations regarding a rate cut in December. Some investors believe that Powell's hawkish statements have clearly hinted that there will be no rate cut in December. However, another group of investors thinks that if employment data continues to deteriorate, the Federal Reserve (FED) may still cut rates again in December. This uncertainty will dominate market trends in the coming weeks, and risk assets may face greater volatility.