The market believes that a rate cut in October is "certain", but some senior officials of the Federal Reserve do not see it that way

The divergence of views between the Federal Reserve and the market is widening. On one side, there are investors who believe that another rate cut in October is inevitable; on the other side, there are some Federal Reserve officials who remain vigilant about inflation and call for caution.

On Monday this week, several local federal reserve bank presidents spoke out intensively, refuting the view that "a rate cut next month is a certainty." They emphasized that even if policymakers need to strike a balance between preventing excessive tightening and fighting inflation, they should not adopt loose policies too quickly.

The core concern of these officials is the persistently high inflation. Cleveland Fed President Beth Hammack said in Frankfurt on Monday that the inflation trend is moving in the "wrong direction". Alberto Musalem, president of the Federal Reserve Bank of St. Louis, also expressed a similar view, believing that policymakers need to "act with caution".

However, the market seems to have ignored these hawkish warnings. According to the trading data of federal funds futures, investors and Wall Street analysts still firmly believe that easing policies are on the horizon. According to the CME FedWatch tool, approximately 90% of investors are betting that the Federal Reserve will cut interest rates by 25 basis points at the October 28-29 meeting, and 70% expect another rate cut in December.

Inflation concerns have become the main reason for hawkish statements

Data released last Friday showed that inflation in the United States remains sticky. Overall PCE inflation rose by 2.7% year-on-year in August, and core PCE inflation increased by 2.9%, both exceeding the Federal Reserve's 2% target.

Hawkish officials generally believe that any overly loose measures are premature until inflation clearly returns to the 2% target.

St. Louis Fed President Alberto Musalem said on Monday that policymakers should "hold up" inflation above the target range.

The view of Beth Hammack, the president of the Cleveland Federal Reserve, is even more acute. She pointed out that the Federal Reserve has "failed to fulfill its mission" for as long as four and a half years because inflation has remained above the target. She said that unlike the downward trend of inflation when interest rates were cut last year, "Over the past year, inflation has basically been in a sideways state, and some components have even risen."

In her view, inflation will not fall back to the 2% target until the end of 2027, so "a restrictive policy stance needs to be maintained".

Other officials have also expressed similar caution. Jeff Schmid, president of the Federal Reserve Bank of Kansas City, said last week that inflation remains too high and the current policies are only "slightly restrictive". Austan Goolsbee, president of the Federal Reserve Bank of Chicago, warned that interest rate cuts should not be implemented too early merely because of the slowdown in employment data.

The downside risk to employment has led to differences

However, this cautious stance has not been recognized by all officials, and the internal divisions within the Federal Reserve are obvious. In the latest economic forecast, 10 officials expect three interest rate cuts this year, while 9 officials expect two or fewer cuts.

Officials who are considered more inclined to cut interest rates mainly reason for the increasingly weak signs in the labor market. New York Fed President John Williams said on Monday that the Federal Reserve does not want to cause "undue harm" to its mission of maximizing employment.

Michelle Bowman, a governor of the Federal Reserve, warned last Thursday that the Fed faces the risk of "lagging behind the curve" on the employment issue and believes that the labor market remains "fragile". The newly appointed director, Stephen Miran, also said that the longer borrowing costs remain high, "the greater the risk that the economy will truly start to see a substantial increase in the unemployment rate."

However, Tom Barkin, the president of the Richmond Fed, believes that as companies have been restricted in recruitment over the past few years, they are unlikely to resort to layoffs, which means that "the downside for the labor market should be limited."

Citigroup economists released a report on Monday saying that the tone of Federal Reserve officials was "too hawkish". The bank believes that officials "overestimated the upside risks to inflation while underestimating the downside risks to employment - a fact that may become more pronounced in the coming months."

Before the meeting at the end of October, the Federal Reserve will obtain the latest inflation and employment data for September, which will be the key basis for decision-making. However, if the US government were to shut down, it might lead to a delay in the release of key economic data, thereby bringing more uncertainty to the decision-making of the Federal Reserve.

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