Multiple Federal Reserve officials support relying on data and cautiously lowering interest rates next year, while Powell's "dovish allies" rarely speak in a hawkish manner

On Friday, December 20th, ahead of the release of the November Personal Consumption Expenditures (PCE) price index, which is the inflation indicator most closely watched by the Federal Reserve, several Federal Reserve officials gave media interviews. Among them, the President of the San Francisco Federal Reserve, viewed as a "dovish ally" of Powell, spoke in a hawkish tone.

This year's voting member Daly: The Federal Reserve has passed the policy recalibration phase, and the number of rate cuts next year may be less than two

Mary Daly, President of the San Francisco Federal Reserve and a voting member of the FOMC this year, stated in an interview with Bloomberg: "My prediction is that the number of rate cuts next year will be much less than we think." She also expressed satisfaction with the median expectation of two rate cuts in the dot plot for 2025.

She mentioned that the Federal Reserve's decision to cut rates by 25 basis points this week was very "close call," indicating that not cutting rates was also under consideration. Analysts believe this is Daly paving the way for expectations of a pause in rate cuts in January or even March next year.

Daly stated that the current U.S. policy and economic conditions are good, and can return to a "more typical gradual approach." She specifically noted that she feels the Federal Reserve has passed the policy recalibration phase:

"We are entering the next phase, which is to truly examine the information we are receiving."

She also mentioned that the Federal Reserve's focus remains on inflation and unemployment, expressing concern over the current inflation rate of 2.5%. The progress on inflation has slowed relative to the Federal Reserve's expectations, and she warned, "We must remain flexible":

"The final number of rate cuts may be less than two. If inflation falls more quickly, or if the labor market shows significant weakness, we may have to respond, and then the final number of rate cuts could be more. I am happy to wait for the data to come in, and the Federal Reserve will respond based on the data. We need to be cautious and wait before deciding on further rate cuts."

Analysts noted that Daly typically leans dovish and aligns with Powell's stance, but her remarks today sounded completely non-dovish and rather hawkish. The futures market indicates a 90% probability of a pause in rate cuts in January and nearly a 50% probability of no cuts in March.

In the dot plot released on Thursday, the Federal Reserve raised the median interest rate for 2025 by 50 basis points to 3.9%, corresponding to a reduction in rate cuts from four to two. The median interest rate for 2026 was raised by 50 basis points to 3.4%, corresponding to two rate cuts. The long-term median interest rate was raised by 10 basis points to 3.0%.

"Third in command" Williams: Adjusting policy must rely on data, will continue to cut rates, but the outlook is quite uncertain

After the release of the PCE inflation data for November, which was lower than expected, Federal Reserve "number three," permanent voter during his tenure, and New York Fed President John Williams stated in an interview with CNBC that despite the uncertain outlook, the Federal Reserve is still expected to continue cutting interest rates. The inflation rate has significantly decreased over the past two years, and the process of inflation decline is still ongoing.

He also reiterated, like Daly, that policy adjustments must rely on data, and since September, U.S. inflation data has been "slightly high," and economic growth has been "slightly stronger than" expected. It is anticipated that economic growth will slow to around 2% next year, with the unemployment rate stabilizing at current levels:

"We have time to really assess the data, evaluate what is happening, and make the best judgment based on the data, the outlook, and the risks to achieving the Federal Reserve's dual mandate. I believe we are in a good position for the future and are prepared."

Regarding the Federal Reserve's next monetary policy direction, Williams hinted that interest rate cuts would continue, but there is a need to wait and observe the data, so there will be no rush to cut rates. He believes that the monetary policy after this week's rate cut "remains quite restrictive," and the Federal Reserve's "basic trajectory is moving towards a neutral interest rate (downward), and I estimate that the neutral rate is 0.25 percentage points higher than before the pandemic."

He specifically mentioned that in 2025, there is "considerable uncertainty" regarding the inflation outlook and many other factors, and acknowledged that Trump's policy proposals have begun to influence his views and economic forecasts:

"In my personal forecast, future fiscal policy, immigration policy, and other policies have been taken into account, as these are important factors affecting the economic outlook. But I want to emphasize that there is still a lot of uncertainty about what these impacts will actually be."

He stated that some of the goals Trump wants to achieve regarding immigration may have already occurred, and he expects the number of immigrants to the U.S. to slow down, "We need to wait and see what happens with fiscal and trade policies," and that everything the Federal Reserve is doing now is "to prepare the policy for anything next year."

Many economists have previously warned that the tariffs and immigration restrictions advocated by Trump could put upward pressure on inflation. However, Federal Reserve Chairman Jerome Powell stated this week that the newly released forecast of "inflation gradually falling to 2%" is based on existing data, rather than expectations of future government policies.

Next year's voters: Inflation is still cooling, and interest rates need to be significantly lowered within a year and a half; this year's dissenting voters: waiting for inflation progress

Similarly, after the release of the PCE inflation data, 2025 voter and Chicago Fed President Austan Goolsbee also accepted an interview with CNBC, stating that "the expected rate cuts by the FOMC in 2025 will be lower than previously estimated."

However, some analysts noted that because he praised the progress of cooling inflation, believing that Friday's inflation data being lower than expected is a positive signal, and that the Federal Reserve is still likely to achieve the 2% inflation target, this has driven U.S. stocks to open lower and then rise, while U.S. Treasury yields fell.

Goolsbee confirmed that despite the Federal Reserve taking a cautious stance, interest rates may still decline further next year. He believes that inflation data indicates "the recent resilience of inflation over the past few months is more of a hurdle than a change in trajectory."

His remarks were more dovish, as he mentioned that the current policy interest rate is restrictive, "still well above the final stopping point of around 3%," and the decline in inflation means the Federal Reserve "needs to significantly lower the policy rate in the next 12 to 18 months."

However, he admitted that his previous prediction of a 100 basis point rate cut in 2025 has now shifted to a more gradual path for rate cuts next year, as uncertainty in policy has led him to change his rate cut bets, but he "still believes the Federal Reserve's rates will decline by a judicious amount next year." He stated that the uncertainty surrounding the policies of incoming President Trump has increased the difficulty of predicting neutral rates and inflation.

He also reiterated that inflation and unemployment data will determine the central bank's future monetary policy. The labor market is stable, and it is necessary to maintain stability in the job market by bringing rates down to neutral levels, but it is still "far from the neutral level." He stated that the Federal Reserve must also "address" the measures taken by Trump's next administration regarding inflation and employment.

Additionally, Cleveland's new Federal Reserve President Harker, who was the only one to dissent at this week's FOMC meeting in support of not cutting rates, stated in a written statement on Friday that inflation remains "elevated," and the rate cut process is "unbalanced," making the strong economic conditions unsuitable for another rate cut at this time. He hopes for more evidence that inflation is moving back toward the 2% target before considering further cuts:

"According to my estimates, monetary policy is not far from the neutral rate, and the outlook risks seem to lean toward rising inflation. Sustained inflation above 2% could undermine the anchoring of inflation expectations, making it more difficult for inflation to return to our target level."

Financial markets currently believe that the Federal Reserve will resume rate cuts in March 2025, with a possible second rate cut in October. The 10-year U.S. Treasury yield, which surged on Wednesday and Thursday, fell more than 7 basis points on Friday, returning below the key level of 4.50%.