With only a short time left until the much-anticipated rate decision, market expectations typically solidify in the week preceding a Federal Reserve meeting. The market appears to have received a subtle cue through Federal Reserve member Mary Daly’s recent statements. Known for her alignment with Chair Jerome Powell’s stance, Daly’s call for a rate cut might signal a shift in the Fed’s overall posture.
December Rate Decision Outlook
Last Friday, the rate positions of all twelve Federal Reserve members were disclosed, revealing an equally divided stance. With Jefferson and Powell undecided for December, we predicted a contentious outcome if the tie is broken. In her recent interview, San Francisco Fed President Daly hinted that this balance might have shifted, an unexpected move from someone perceived as closely aligned with Powell’s views.
“In the labor market, I’m not certain we can overcome this situation. Currently, it’s fragile enough, with the risk of nonlinear change.”
Earlier this year, Daly expected inflation spikes due to tariff-induced cost increases, a risk that has substantially weakened. This implies a refocusing on employment rather than inflation.
“If this situation (low employment and low layoffs) continues, and if added layoffs or companies state ‘My production is not increasing as expected… I’ll reduce employment,’ it would make us quite vulnerable.”
Members favoring a rate cut include Bowman, Cook, Miran, Waller, and Williams, while those opposing it are Barr, Collins, Goolsbee, Musalem, and Schmid—the latter being the most opposed.
Although Powell and Jefferson remain undecided, their remarks lean towards a rate cut. Among seven non-voting members, Paulson and Daly advocate cuts, with some gaining voting rights in the January rotation. Opponents in this group include Hammack, Kashkari, Logan, and Bostic, while Barkin is uncertain.
The probability of a rate cut, which had dropped to 30% last week, has now surged past 80% as this article was being prepared. The Federal Reserve avoids surprises, so if a cut is to happen, there are less than 10 days to prepare the markets, failing which a significant sell-off could ensue.