Faults at the Fed: Disputes over tariffs, labor, and the forthcoming rate cut
Recently, we examined how the ongoing debate regarding rate cuts has unsettled long-standing alliances within the Federal Reserve. Today, let’s dive into the sources of division and its implications for the market.
The Fed’s unusual divisions
Divisions within the Fed now extend beyond the traditional “hawks” and “doves,” or even the typical Republican and Democratic appointees. Instead, we see surprising coalitions emerging around two critical questions: Are tariffs posing a lasting inflation threat? And is the labor market revealing deeper vulnerabilities, or is it still in good shape?
These discussions are significant, especially as the Fed faces a decision on whether to make another rate cut in December. It’s a complicated scenario, and even data alone isn’t resolving the debate.
Seven Federal Reserve Board members and 12 Reserve Bank Presidents are set to meet on October 28, 2025, for the Federal Open Market Committee (FOMC) meeting. (Federal Reserve System via Flickr)
There’s a fundamental rift regarding inflation’s current state. The dovish faction argues that tariff-driven price hikes are temporary and should be viewed with that in mind. This perspective is akin to how central banks have historically treated oil price fluctuations. Conversely, hawks view inflation as a more persistent issue, one that has exceeded targets for years. Many hawks, driven by a strong conviction against tariffs, argue that they contribute to rising prices in a detrimental way.
Current inflation data appear to lend support to the dovish view. Although headline inflation stands at 3%, signs of easing in manufacturing price pressures, coupled with the notion that remaining inflation stems largely from tariffs, suggest these price increases could indeed be fleeting. The core goods consumer price index has only risen by 1.5%. The index for core goods, excluding used cars, shows a modest increase of 1.1% year over year. Durable goods prices have climbed just 1.8%, while clothing prices have dipped slightly. It seems unlikely that significant tariff pressure exists in these areas.
Moreover, Fed officials are interpreting labor market signals quite differently. Lisa Cook highlights that unemployment is increasing among vulnerable demographics—like young and black workers—and that financial strain is growing for lower and middle-income families. She describes this as a “two-speed economy,” where prosperity is concentrated among the wealthy while others face difficulties. Michelle Bowman points out the drop in the employment-to-population ratio, indicating the country might be more fragile than the standard unemployment rate reflects.
Manufacturing data reinforces these worries. A respondent from the chemicals sector noted, “Business is challenging. Customers cancel or reduce orders due to uncertainties in the global economy and the fluctuating tariff situation.” According to an ISM report, manufacturing contracted by 58% of GDP in October.
Hawks counter that the labor market is still close to full employment by historical measures. They argue that excessive policy easing could reignite inflation without significantly aiding employment growth. Additionally, they can cite the Atlanta Fed’s GDPNow measure, which sits at 4%, suggesting a strong economic pace.
High-Stakes December Meeting
The diminishing market odds for a December rate cut highlight the real uncertainty about which faction may prevail. Just last week, traders were almost certain the Fed would enact a rate cut next month, expecting a reduction down to the latest inflation data. But that confidence faded after the meeting concluded, influenced by Fed Chairman Jerome Powell’s cautious remarks, Jeffrey Schmidt’s dissent against maintaining current rates, and Stephen Milan’s resistance to further cuts.
Economic data leading up to December will be crucial. However, it’s uncertain what data might be available due to the government shutdown.
This realignment in perspectives reflects shifts beyond monetary policy; it indicates a broader change in how economic policy coalitions form across different political spheres. Traditional conflicts—like Keynesians versus monetarists—are evolving into new divides.
Currently, the market is opting for caution. A 65% chance of further rate cuts in December looms, a notable drop from the certainty just a week ago. In such a divided central bank, even basic policy decisions are now sources of significant debate.
In the end, one viewpoint may emerge victorious. If inflation stays moderate while the labor market softens, the dovish stance will gain traction. Conversely, if inflation surprises on the upside, the hawks will look vindicated.
What’s clear is that the December meeting will challenge the divided Fed to navigate these complex risks. Unlike previous eras, predicting officials’ votes based on their appointments has become increasingly difficult.
At this redefined Fed, unexpected alliances are shaping unconventional monetary policies, leaving the final outcomes more uncertain than ever.
