Powell Caught Between Inflation Pressure and Growing Recession Fears

Investor confidence in a December rate cut has dropped to just 49% after hawkish comments from Fed officials. With policymakers divided, markets brace for either a “hawkish hold” or one final symbolic cut before the cycle ends.

Markets Split on December Rate Cut as Fed Officials Cast Doubt: Powell Faces Tough Balancing Act

1. Rate-Cut Optimism Fades as Fed Voices Caution

A few weeks ago, traders were almost certain that the Federal Reserve would cut interest rates again in December. Now, that confidence has vanished.
Futures markets tracked by the CME Group’s FedWatch tool show only a 49.4% chance of a quarter-point reduction at the December 9–10 meeting, down sharply from 95% a month ago.

The shift reflects mounting unease among Fed officials and a data vacuum following the six-week U.S. government shutdown.
Chair Jerome Powell had already warned that another rate cut was “far from a foregone conclusion,” and his colleagues’ latest comments reinforced that message.

As markets digested the new tone, stocks fell and Treasury yields climbed, signaling that investors now see the December decision as a true coin toss rather than a near-certainty.

2. Data Uncertainty Keeps Policymakers Divided

With the flow of official data disrupted by the shutdown, Fed officials are essentially “flying blind.”
Recent readings suggest a softening labor market but inflation still above the 2% target.
The White House confirmed that October data may never be released, leaving the central bank without the full economic picture it usually relies on.

That uncertainty has sparked deep divisions within the Federal Open Market Committee (FOMC).
Some members worry that further easing could reignite inflation, while others argue the Fed risks tightening financial conditions too much if it pauses.
As a result, traders now see Powell’s task as one of maintaining unity within a fractured committee while preserving the Fed’s credibility.

3. Collins Breaks Silence With Blunt Warning on Inflation

A rare moment of candor this week came from Boston Fed President Susan Collins, who delivered one of her most forthright speeches since joining the central bank.
Known for measured language, Collins warned that it would likely be “appropriate to keep policy rates at the current level for some time” to balance inflation and employment risks.

“I see several reasons to have a relatively high bar for additional easing in the near term,” she said, adding that the economy remains fundamentally solid despite slower hiring.

Her comments placed her firmly among the Fed’s hawkish bloc, alongside Kansas City Fed President Jeffrey Schmid, Cleveland’s Beth Hammack, and potentially Lorie Logan in Dallas and Alberto Musalem in St. Louis.
These members argue that premature easing could undo progress on inflation, particularly as tariff-related costs ripple through supply chains.

By contrast, Governors Stephen Miran, Christopher Waller, and Michelle Bowman have favored more aggressive cuts, warning that restrictive policy risks choking off growth.

4. Powell’s Challenge: Keep the Fed Unified

Chair Powell now faces one of the toughest balancing acts of his tenure.
He must navigate sharp internal divisions without eroding market confidence in the Fed’s independence.
Analysts at Evercore ISI, led by Krishna Guha, estimate that a December cut remains “more likely than not,” but only at 55–60% probability, reflecting the lack of conviction across the committee.

Guha added:

“We do not think Powell wants the Committee to break apart publicly with mass hawkish dissents at this institutionally perilous moment.”

To avoid a split vote, Powell and senior deputies — Vice Chair Philip Jefferson and New York Fed President John Williams — have reportedly adopted a conciliatory stance, emphasizing that December should be viewed as a 50-50 call rather than a certainty.
That approach allows the Chair to buy time while gauging how the incoming data, if any, reshape inflation and growth expectations.

5. A “Hawkish Cut” or a Hold? Markets Weigh Scenarios

With the Fed’s next move finely balanced, markets are debating two possible scenarios:

A “hawkish hold,” in which policymakers keep rates unchanged but signal readiness to ease in January.

A “hawkish cut,” delivering one final reduction while signaling that the rate-cut cycle is likely over.

According to Thierry Wizman, global FX and rates strategist at Macquarie Group, Powell may be “forced into a compromise” to preserve unity.

“Either the Fed stays on hold in December, or if it does cut, it will have to make clear that the easing phase is ending,” Wizman wrote.

Looking ahead, futures markets suggest that if the Fed skips December, there’s about a 70% chance of a cut in January 2026, once a new rotation of regional Fed presidents gains voting rights.
Several current hawks, including Collins and Schmid, will rotate out, potentially tilting the committee slightly more dovish just as Powell’s term as Chair nears its end in May.

Conclusion

The once-confident market consensus around a December rate cut has evaporated.
Fed Chair Jerome Powell now finds himself juggling conflicting mandates — sustaining employment while keeping inflation under control — amid an unusually divided committee and patchy economic data.
Whether the Fed opts for a “hawkish hold” or a symbolic final cut, investors agree on one point: the easy-money era of 2024 is drawing to a close.
With volatility rising and Treasury yields back on the climb, markets are preparing for a longer period of elevated rates and cautious policymaking.

FQAs

1. What is the current market probability of a December rate cut?
→ Futures pricing from the CME FedWatch tool shows just 49.4% odds of a quarter-point cut, down from 95% a month ago.

2. Why has sentiment shifted so quickly?
→ Hawkish comments from multiple Fed officials and uncertainty caused by the government shutdown have raised doubts about further easing this year.

3. Who are the key hawkish and dovish voices on the Fed right now?
→ Hawks include Susan Collins, Jeffrey Schmid, and Beth Hammack. Dovish members such as Stephen Miran and Christopher Waller support deeper cuts to sustain growth.

4. What options does Powell have for December?
→ Powell could hold rates steady or opt for a small “hawkish cut,” signaling that the easing cycle is ending while keeping the Fed’s unity intact.