U.S. Federal Reserve Chairman Jerome Powell during a press conference after the Federal Open Market Committee (FOMC) on Wednesday, October 29, 2025 in Washington, DC, USA.
Al Drago | Bloomberg | Getty Images
In his final months as head of the all-powerful U.S. central bank, Federal Reserve Chairman Jerome Powell faces at least the toughest, if not the toughest challenge of his time in office.
Mr. Powell, who just gave a surprisingly tough talk on Wednesday about the possibility of another interest rate cut in December, will have to navigate a suddenly contentious atmosphere among policymakers that will be divisive no matter which direction the Fed chooses.
While this is not the existential economic threat posed by the 2020 coronavirus pandemic, it nonetheless represents an unusual level of crisis for the institution.
“December could be a chaotic month,” Bank of America economist Aditya Bhave said in a client note. “We still think the Fed under Powell will not cut rates again. But unless the data shows a clear signal in either direction, December’s decision will be even more contentious than October’s.”
The Federal Reserve on Wednesday approved a widely expected quarterly interest rate cut, lowering the benchmark rate to 3.75% to 4%. However, Chairman Powell warned that a further rate cut in December was “not a foregone conclusion” and was not expected by the market.
While Wall Street economists and strategists were divided over whether the committee would actually approve additional cuts at its Dec. 9-10 meeting, they agreed that this is a pivotal moment for Mr. Powell and the legacy he will ultimately leave behind when his term ends in May.
“Even without a lot of additional data due to the government shutdown, it may actually make sense to go against market prices to preserve options going forward,” said Michael Gapen, chief U.S. economist at Morgan Stanley. “A 95% chance of a December rate cut does not seem to be consistent with the Fed’s data-driven thinking.”
market reaction
Traders did not buy the hawks’ statements. Federal funds futures pricing on Thursday still showed a 75% chance of a rate cut in December, down from about 90% a day earlier, according to CME Group’s FedWatch.
But in a press conference after Wednesday’s meeting, Powell did his best to dispel the idea that the cuts, the third since September, were a complete failure.
The gist of his argument was multifaceted. Data available during the government shutdown blackout shows the economy is largely stable, although there are risks to the labor market. Inflation remains above target. And in an unusual development, there are “widely different” views on the FOMC about where policy should go.
The market was clearly caught off guard by the move, with stock prices falling and Treasury yields soaring. On Thursday, the yield on the 10-year U.S. Treasury was firmly above 4%, while the policy-sensitive 2-year bond rose more than 3.6%, its highest level in nearly a month.
“The reaction in the bond market should certainly give Fed officials pause,” said Ed Yardeni, head of Yardeni Research and creator of the term “bond vigilantes” to describe buyer strikes in the bond market. “The bond market is not buying the Fed’s cover story that interest rates were too restrictive.”
For Powell, the December statement was an unusual move given that markets had been expecting a more neutral tone. Asked whether he was concerned about strong expectations for further rate cuts, Powell said markets should “take” his statement that lower rates “are not a foregone conclusion.”
“We have to act now because we don’t want to surprise the market in a few weeks. Now is the time,” said Dan North, senior economist for North America at Allianz Trade. “He doesn’t usually use his words so forcefully, so that was interesting. He’s obviously trying to quash the speculation about December. We feel the same way. December will be a break.”
political mischief
This development comes at an awkward time for the Fed.
Mr. Powell, a favorite target of President Donald Trump’s criticism, has only about seven months left in his term. Treasury Secretary Scott Bessent has been busy interviewing candidates to replace him, including current governors Christopher Waller and Michelle Bowman, who both voted in favor of the cuts.
Additionally, Gov. Stephen Millan, who was handpicked by President Trump to serve a term that runs through January, again voted against the vote by half a percentage point.
At the other end of the spectrum, Kansas City Fed President Jeffrey Schmidt similarly voted “no” because he didn’t want to lower rates. There is a wide range of opinions between the two parties regarding the typically consensus-driven FOMC.
A central question in the coming weeks will be whether Chairman Powell’s dovish attitude reflects mere courtesy or deeper concerns about lowering interest rates.
“While the press conference went a little differently than we expected, we have not changed our outlook for the Fed and continue to think a December rate cut is very likely,” said David Mericle, an economist at Goldman Sachs. “There is significant opposition at the FOMC to lowering risk controls, and we suspect that Chairman Powell thought it important to address the concerns of other participants in today’s press conference. However, we still think the December rate cut discussion remains in place.”
