Powell forced to stave off uprisings in markets and on his own Fed board as his term ends
U.S. Federal Reserve Chairman Jerome Powell at a press conference following the Federal Open Market Committee (FOMC) meeting on Wednesday, October 29, 2025 in Washington, DC, USA.
Take Drago | Bloomberg | Getty Images
Federal Reserve Chairman Jerome Powell faces, if not the toughest challenge of his time in office, at least the toughest challenge of his final months as head of the powerful U.S. central bank.
After speaking surprisingly harshly on Wednesday about the potential for another rate cut in December, Powell will have to navigate the suddenly contentious atmosphere among policymakers that will make the direction the Fed chooses divisive.
While this is not the existential economic threat posed by the Covid pandemic of 2020, it still represents an unusual level of danger to the institution.
“December could be complicated,” Bank of America economist Aditya Bhave said in a client note. “We still think the Fed will not cut rates again under Chairman Powell. But unless there is a clear signal from the data in either direction, the December decision will likely be much more controversial than the October one.”
The Fed on Wednesday approved a widely anticipated quarter-point rate cut that lowers its benchmark interest rate to 3.75%-4%. But Powell warned that a rate cut in December was “not a foregone conclusion” and was not something the market expected.
Although Wall Street economists and strategists were divided on whether the committee would approve another cut at the Dec. 9-10 meeting, they agreed that this was a pivotal moment for Powell and the legacy he will leave when his term ends in May.
“Even in a situation where there is not a lot of additional data due to the shutdown, it may make sense to push against market pricing to ensure continued discretionary,” wrote Michael Gapen, chief U.S. economist at Morgan Stanley. “The 95% probability attributed to a rate cut in December does not seem consistent with the Fed’s dependence on data.”
Markets react
Traders, however, did not accept the hawkish rhetoric. Fed funds futures prices on Thursday still pointed to a 75% chance of a rate cut in December, but that was down from around 90% the day before, according to a report from CME Group. FedWatch.
But in his post-meeting news conference Wednesday, Powell went to great lengths to dispel the idea that the cut, which would be the third since September, was a slam dunk.
The impetus for his claim was multifaceted: Data available during the government shutdown showed a largely stable economy, although the labor market was a risk; inflation still above target; and, in an unusual development, there are “very different” views within the FOMC on where policy should go.
Markets were clearly caught off guard by this move, with stocks falling and Treasury yields rising. The 10-year Treasury yield remained solidly above 4% on Thursday, while the policy-sensitive 2-year bond rose above 3.6%, the highest level in nearly a month.
“The bond market reaction should certainly give Fed officials pause,” wrote Ed Yardeni, president of Yardeni Research and who coined the term “bond vigilantes” to describe buyers’ strikes in fixed-income markets. “The bond market is not buying the Fed’s made-up story that interest rates are too restrictive.”
According to Powell, the December announcement was an unusual step given that markets had expected a more neutral tone. Asked whether the strong expectation of another cut bothered him, Powell said markets should “take note” of his statement that a cut “is not a foregone conclusion.”
“You have to get ahead of this because you don’t want to surprise the market a few weeks from now. Now is the time to do it,” said Dan North, senior North America economist at Allianz Trade. “He doesn’t usually use words this strongly. This was interesting and he’s clearly trying to quell speculation about December. We think the same way, December will be a pause.”
political bulge
The developments come at a worrying time for the Fed.
Powell, a favorite target of President Donald Trump’s criticism, has only about seven months left in his term. Treasury Secretary Scott Bessent is busy Discussions are being held with potential successors, including current Governors Christopher Waller and Michelle Bowman, who both voted in favor of the cut.
In addition, Trump’s handpicked Governor Stephen Miran, who will serve only through January, once again opposed the vote by half a point in favor.
At the other end of the spectrum, Kansas City Fed President Jeffrey Schmid also voted “no” because he wanted to avoid making cuts. There are a variety of views among them about the normally consensual FOMC.
Whether Powell’s tipping of the hat to the doves is simply out of politeness or deeper doubts about the cuts will be at the center of Fed analysis in the coming weeks.
“Although the press conference turned out differently than we expected, we left our Fed forecast unchanged and continue to view a December rate cut as highly likely,” Goldman Sachs economist David Mericle wrote. “We suspect there is significant opposition to the risk management cuts at the FOMC, and that Powell thought it was important to address the concerns of other participants at today’s press conference. But we think the arguments for a December rate cut still remain solid.”
