Why are dovish Federal Reserve officials strongly supporting rate cuts? The true considerations behind policy divergence

Federal Reserve official Musialem recently stated that he supported a rate cut in December, primarily based on two core judgments: that the labor market faces slightly higher risks, and that the risks of accelerating inflation are easing. This statement reveals genuine internal disagreements within the Federal Reserve regarding the policy path.

Two Key Considerations Behind the Dovish Signal

Musialem’s support for a rate cut is based on specific assessments of the current economic situation. He is not focused on inflation itself but on the risk of inflation accelerating, which he believes is easing. At the same time, he explicitly emphasizes the fragility of the labor market.

This analytical framework across these two dimensions is quite interesting:

This suggests that Musialem believes the main threat to the economy is not inflation but potential deterioration in the employment market.

Internal Policy Divergence within the Fed

It is worth noting that Musialem’s stance contrasts sharply with that of Federal Reserve Bank of New York President Williams. Williams stated during the same period that, under current economic conditions, there is no reason to cut rates in the short term, signaling a clear hawkish stance.

This divergence reflects a significant split among Fed officials in their interpretation of the economic outlook:

• Doves (e.g., Musialem): Focus on labor market risks, favoring policy support
• Hawks (e.g., Williams): Remain vigilant on inflation, favoring continued tightening

The Labor Market Becomes the New Focus

The most valuable aspect of this statement is that it brings the risks associated with the labor market to the forefront of Fed decision-making. For some time, inflation has been the core concern for the Fed, but Musialem’s remarks imply that, as inflation pressures ease, the stability of the employment market is becoming a more urgent consideration.

This aligns with the actual trajectory of the U.S. economy. Although the labor market remains relatively resilient overall, cracks are beginning to appear, which could be a key reason for internal divergence within the Fed.

Upcoming Speech Will Clarify Further

It is worth noting that Musialem plans to deliver a speech at 23:00 on January 13. According to relevant information, this speech is likely to further elaborate on his views regarding the policy path. Coupled with the upcoming release of the U.S. December CPI data at 21:30 on the same day, these two events will jointly provide important clues about the Fed’s future policy direction.

If the CPI data shows continued inflation decline, Musialem’s dovish stance may gain more supporters. Conversely, if the data falls short of expectations, hawkish Fed officials might reinforce their positions.

Summary

Musialem’s remarks essentially leave room for potential policy adjustments by the Fed. He emphasizes not necessarily cutting rates now but explaining the rationale and necessity for a rate cut. This signals that the Fed is reassessing the risks in the labor market, which could indicate a shift in future policy. The current internal policy divergence within the Fed precisely reflects the complexity of the economic situation—there are no simple hawkish or dovish stances, only different assessments of various risks.