Statistics on statements after interest rate cuts: Federal Reserve officials generally believe that "interest rates should decline, but the issue is timing and magnitude."

The current consensus rift within the Federal Reserve is becoming apparent. Although the direction is consistent, the pace is markedly different.

According to the Wind Trading Desk, on December 22, Morgan Stanley's Michael T Gapen analysis team released a report indicating that based on the statements of five Federal Reserve officials up to the week ending December 19, the core conclusion is very clear: the federal funds rate is bound to decline, but there is intense debate over "when to cut" and "by how much."

For investors, the current trading logic is no longer about "whether to cut rates," but rather betting on which side's arguments will dominate the policy path. The current situation shows a clear polarization: hawks represented by Bostic and Goolsbee tend to wait, concerned about inflation stickiness and tariff impacts; while doves led by Miran and Waller clearly advocate for "preemptive rate cuts," warning that the labor market is already showing signs of fatigue.

The key investment signal lies in the upcoming December employment report. If the unemployment rate continues to rise, confirming Waller's judgment that job growth is "close to zero at this moment," then rate cuts in January and April next year will be repriced by the market.

Conversely, if the data remains strong, the rate cut window will be pushed back to later in 2026. Additionally, the Federal Reserve has begun purchasing short-term government bonds to manage reserves. Although officials deny this is quantitative easing (QE), it is undoubtedly a fine-tuning of liquidity management, which seasoned investors should closely monitor.

Hawk-Dove Camp Split: Aggressive Rate Cuts vs. Data Dependence

The divisions within the Federal Reserve have never been so public. Based on last week's public speeches, Morgan Stanley clearly delineates two camps:

• Proponents of preemptive rate cuts (Miran, Waller, Williams): Governor Miran is the most aggressive in his stance. He voted to cut rates by 50 basis points at the September meeting, believing current policy is too tight. He warned that without timely adjustments, inflation could fall below the 2% target by 2027, while the labor market would be too weak. Governor Waller clearly stated that as long as he believes inflation is under control and expectations are stable, then a weak labor market "tells us we should continue to cut rates." New York Fed President Williams also leans towards rate cuts, believing that rates will ultimately decline. However, he emphasized that decisions must "depend on data," requiring careful assessment of economic prospects and risk balance, making him the most cautious among the doves.
• Emphasizing risks and waiting (Bostic, Goolsbee): Atlanta Fed President Bostic and Chicago Fed President Goolsbee are more concerned about the persistence of inflation. They prefer to wait for more concrete evidence to prove that the inflationary pressures from tariffs are only temporary, opposing premature and excessive rate cuts without clear signals.

Growth Expectations: Betting on an Economic Rebound in 2026

Despite the current policy uncertainty and the potential government shutdown in 2025 weighing on the economy, Federal Reserve officials are generally optimistic about growth in 2026.

Williams pointed out that despite facing headwinds from geopolitical and trade policies, the U.S. economy still shows considerable resilience in 2025. He predicts that with support from fiscal policy, improved financial conditions, and increased investment in artificial intelligence, real GDP growth in 2026 will accelerate to around 2.25%, higher than the approximately 1.5% in 2025. **

Waller also echoed this view, believing that once the uncertainty surrounding tariffs dissipates, combined with fiscal stimulus and productivity effects, the downside risks are limited.

Labor Market Alert: Is It Actually "Zero Growth"?

This is the most disturbing data point in the research report and the risk that investors should be most wary of.

Although Bostic believes that a 4.6% unemployment rate is "not bad" by historical standards, Waller issued a clear warning: the labor market is not healthy. He pointed out that the number of jobs added in recent months has been about 50,000 to 60,000 per month, and considering possible downward revisions, current job growth is actually "close to zero."

Director Milan further pointed out that the trend of weakness in the labor market has persisted for several years with no signs of reversal, and the current situation is far from "full employment." If the central bank is to be forward-looking, it must further ease now to support employment.

Inflation Maze: Tariff Effects and "Phantom Inflation"

Regarding inflation, there are significant technical differences in officials' views, which directly affect whether inflation caused by tariffs will be seen as a "temporary" shock.

• Williams' Estimate: The process of inflation falling back to 2% has temporarily stalled (currently around 2.75%), but this is mainly because tariffs contributed about 0.5 percentage points. He believes the pass-through effect of tariffs is milder and prolonged than expected, and he has not seen secondary inflation effects.
• Milan's Unique Perspective: He believes exporters bear at least 70% of the tariff costs, and the impact of tariffs on consumer prices is merely "about 0.2% noise." He even proposed the concept of "phantom inflation," arguing that the current housing inflation is just a "lagging echo" of past supply-demand imbalances, while portfolio management fees are a complete estimate that does not reflect real inflationary pressures.
• Hawkish Concerns: In contrast, Bostic is worried that inflation may spiral upward, drifting further away from the target. Gulbis emphasized that interest rates should not be lowered too quickly until it is certain that the impact of tariffs is temporary.

Denial of Quantitative Easing (QE): Just Reserve Management?

Regarding the Federal Reserve's resumption of purchasing Treasury securities, there are questions in the market about whether this constitutes a form of QE. In response, Waller and Williams provided clear technical rebuttals.

They insisted that this is absolutely not quantitative easing (QE). Waller explained that this is a "natural growth of the balance sheet" in response to cash demand and bank reserve needs, estimated to grow by about $20 billion to $25 billion per month.

Williams emphasized that QE is about lowering long-term rates by purchasing long-term bonds, while they are currently buying short-term securities to ensure that the banking system has an appropriate level of reserves to cope with liquidity fluctuations (such as those brought by tax season), primarily affecting short-term rates rather than attempting to change the premium on 10-year maturities