Fed's Deepening Splits Over Trump Policies and Inflation Cloud December Decision

The probability of a Federal Reserve rate cut in December has swung dramatically this week, reflecting shifting signals from central bank officials and a volatile market response. After plunging to 33% following the government shutdown that delayed key employment data, expectations for a 25-basis-point cut have rebounded to 67.3% as New York Fed President John Williams' speech last Friday signaled support for further easing. The Fed's December 10 meeting now stands as a pivotal moment in a year of unprecedented uncertainty, with internal divisions and external pressures complicating the path to policy action.

The initial collapse in rate-cut odds stemmed from the cancellation of the October nonfarm payrolls report and the delayed release of November data, which left the Fed without critical labor market insights ahead of its final 2025 decision. Traders on the CME Group's FedWatch tool slashed the chance of a cut to 27.8% on November 20, reflecting fears that weak September jobs data or inflation risks could force a pause. However, Williams' comments—backed by his alignment with Chair Jerome Powell and Governor Christopher Waller—revived optimism that the Fed's "Big Three" leadership would prioritize easing monetary policy.

This shift underscores deepening fractures within the Federal Open Market Committee (FOMC). While Powell has faced growing resistance to a December cut, recent speeches and minutes from the October meeting revealed stark disagreements over inflation, labor market weakness, and the economic impact of President Trump's policies. Some officials argue that Trump's trade and immigration agenda is stifling job growth and pushing up prices, creating a "stagflationary" dilemma. Others, like Cleveland Fed President Loretta Mester, have warned that cuts could prematurely signal policy easing in a fragile environment.

The market's reaction has been equally volatile. Bitcoin, which fell from $110,000 to $89,000 after Powell's October remarks, saw a temporary rebound following Williams' speech. Crypto-related stocks, however, remain under pressure, with stablecoin issuer Circle (CRCL) down 50% year-to-date as traders priced in reduced cut odds. Meanwhile, the U.S. dollar surged above its 200-day moving average as traders priced in reduced cut odds, though recent data-including a 4.4% September unemployment rate has reignited concerns about labor market fragility.

Looking ahead, the Fed's December decision will hinge on whether officials can reconcile these divergent views. Vanguard's Josh Hirt, citing Williams' remarks, described the leadership's support for a cut as "a heavyweight camp that is difficult to shake," while Wells Fargo's Tom Porcelli argued the labor market's "precarious spot" justifies action. Yet dissent is expected, with at least one FOMC member likely to oppose a cut, echoing the narrow consensus that has defined the Fed's 2025 policy trajectory.