As the Federal Reserve prepares for its upcoming policy meeting in October 2025, the U.S. economy is grappling with the dual challenges of a weak labor market and inflationary pressures. On Thursday, October 16, several Fed officials voiced their concerns about the labor market, while expressing relative optimism regarding inflation impacts driven by trade tariffs. This not only indicates a near certainty of an interest rate cut this month but also highlights a strengthening dovish sentiment within the Fed. Waller, a potential future chair, advocates for a gradual rate cut, while Milan calls for more aggressive action, and Kashkari emphasizes the “insurance” role of rate cuts. Together, these viewpoints illustrate the Fed's decision-making dilemma amidst data shortages and deepening divides regarding future economic trajectories.
Waller's Dovish Turn: A Focus on Weakened Employment, A 25 Basis Point Rate Cut on the Horizon Federal Reserve Governor Christopher Waller expressed his concerns about the labor market during a speech at the Council on Foreign Relations on October 16 in New York. He noted that current employment data present mixed signals, with a pronounced trend of weakening demand relative to supply, despite a significant decline in net immigration and a drop in labor participation rates. Waller emphasized that the government shutdown has resulted in the absence of official data, forcing the Fed to rely on private sources for employment assessments. While these data may not be entirely consistent, they collectively convey a “clear warning.”
Waller stated that based on the available information, he supports the Federal Open Market Committee's decision to reduce the policy interest rate by 25 basis points at the end of this month, further pushing rates down from the current range of 4.00% to 4.25%. He explained that future policy directions are highly dependent on economic data. He is particularly focused on how robust GDP growth may correlate with a weak labor market; if signs of employment recovery emerge, the pace of rate cuts could slow. However, if hiring remains weak and inflation remains controllable, he believes the Fed should continue lowering rates to a neutral level approximately 100 to 125 basis points below current rates, landing in the range of 2.75% to 3.00%.
Waller reiterated that the impact of trade tariffs on inflation is limited, viewing them as a one-time price adjustment, thereby allowing the Fed to shift its policy focus more firmly toward employment support. As one of the early advocates for rate cuts, his position arises from deep concerns about weakening employment dynamics and a belief that the Fed can “ignore” the short-term impacts of tariffs. Observers note that Waller's recent warning against conditions no longer warranting rate cuts marks a significant shift in his dovish stance, particularly notable in the context of strong economic growth juxtaposed with employment contradictions.
Milan's Aggressive Stance: Emerging Risks Necessitate Bold Easing to Prevent Economic Fragility In contrast to Waller's gradual approach, newly appointed Fed Governor Milan, during remarks in Washington, continues to push for a more aggressive rate-cutting strategy in 2025 than his colleagues. Milan's unique background, having temporarily stepped in during a leave from the Trump administration, infuses his viewpoints with a political element that is rare within the Fed.
He believes that broader adjustments, including changes in immigration policy, will help alleviate inflationary pressures, thereby providing ample room for the Fed to lower short-term borrowing costs. Importantly, he identifies the renewed escalation in U.S.-China trade tensions as a “new risk that did not exist a week ago,” altering the overall risk balance and compelling the Fed to act decisively.
Milan candidly states that while he was initially optimistic about the U.S. economic situation, he still views it as acceptable, though tight monetary policy is now seen as a significant concern. If this restrictive policy continues for too long, it could directly lead to downside risks and make the economy more susceptible to new shocks. He dismisses concerns that rate cuts could destabilize financial markets, particularly emphasizing that the housing market remains "very tight," suggesting that even lower credit costs are unlikely to spark excessive speculation or asset bubbles.
Milan's aggressive recommendations have generated considerable debate within the Fed, especially as inflation remains above the 2% target, bolstering support for a more accommodative policy.
Kashkari's Risk Assessment: Labor Market Decline Outweighs Inflation Surge, Rate Cuts as an Insurance Measure On October 16, Minneapolis Fed President Neel Kashkari added further insights into the economic slowdown during a meeting in Rapid City, South Dakota. He asserted that the likelihood of significant weaknesses in the labor market or surges in inflation is low, but the risk of unexpected negative labor market conditions is markedly higher than that of substantial inflation increases.
Kashkari suggested that if one were to speculate about potential errors by the Fed, it would more likely be overestimating the extent of economic slowdown, rather than recognizing resilience in actual conditions. He had previously supported a 25-basis point rate cut in September and sees a rationale for two additional cuts totaling 50 basis points by the year's end. He views rate cuts as a form of “insurance,” intended to guard against unlikely but high-impact negative outcomes, akin to the Fed's actions last year aimed at supporting a labor market beset by concerns, which ultimately proved to be unexpectedly robust.
Regarding inflation, Kashkari remarked that the inflation rate is unlikely to surge to 4% or 5%, as the impact of tariff rates on inflation can be quantitatively assessed. Therefore, the risks are more likely to be persistent, such as remaining around the 3% mark for an extended period rather than being a one-time event. The Fed's target inflation rate is 2%, with August data at 2.7%. Some colleagues have been cautious about rate cuts due to this, but Kashkari emphasized that even though the government shutdown has delayed the release of official data, the Fed has maintained a good grasp of the economy through private sources and corporate interactions.
However, he warned that prolonged shutdowns diminish confidence in economic readings, as gold-standard government data is irreplaceable. These remarks further underscore the necessity of rate cuts, highlighting the Fed's adaptive strategy amid data vacuums.
Meeting Expectations and Market Impact: Rate Cuts Likely, But Future Path Uncertain In summary, during the Fed's policy meeting scheduled for October 28-29, despite data shortages, markets widely expect a further 25-basis point rate cut. This aligns with last month's action that lowered rates to the 4.00% to 4.25% range. According to September forecasts, by the year's end, rates are expected to drop to the 3.5% to 3.75% range and further to 3.25% to 3.5% next year. Fed Chair Jerome Powell stated on Tuesday that the outlook for employment and inflation has not changed significantly since the September meeting, but an increase in downside risks to employment has altered the risk assessment, supporting the likelihood of an October rate cut. Some officials express a pessimistic view regarding inflation forecasts and remain cautious about rate cuts, but more agree that tariffs represent merely a short-term risk.
Waller, as a potential successor to Powell when his term ends in May next year, is closely observed for his dovish statements. Analysts at Evercore ISI caution that while an October rate cut seems certain, if economic growth results in improved employment, a December cut is not guaranteed. This ongoing debate among officials not only reflects the Fed's prioritization of employment stability but also signals the fragility of the U.S. economy in the face of trade, geopolitical tensions, and policy uncertainties. Investors are advised to closely monitor private data and trade developments, as any surprises could amplify market volatility and ultimately determine the Fed's degree of easing and the future of the economy.
In the short term, the expectation of an October rate cut combined with a weaker dollar is likely to drive gold prices higher, with investors paying attention to the U.S. CPI data due on October 24 to assess whether inflationary pressures align with officials' moderating expectations. In the long run, the trajectory of gold prices will depend on employment data and the pace of Fed rate cuts; should the Fed pause rate cuts in December or if the economy demonstrates resilience, gold prices may face a correction.
As of 09:22 Beijing time, spot gold is quoted at $4,337.18 per ounce.