The Growing Divide Within the Federal Reserve Is Not a Minor Event—It Is the Event Itself

In recent months, a familiar tension has re-emerged within the Federal Reserve: there are profound and open divisions among its members. The recent meeting saw multiple dissenting votes, a situation that has not occurred since 2019. The market's reaction to the prospect of rate cuts has not been strong; rather, it is responding to the uncertainty surrounding this decision. When the central bank cannot reach a consensus on its outlook, the market also struggles to form a unified expectation.

This growing divergence explains why major risk assets—stocks, cryptocurrencies, commodities, and foreign exchange markets—have lost clear direction. When the policy environment is predictable, capital flows confidently. But when the world's most influential central bank sends ambiguous signals, capital becomes cautious. Investors are reluctant to chase breakouts, hedge funds avoid increasing net exposure, and retail traders lose confidence. Liquidity thins, volatility decreases, and the market consolidates.

The root cause of this economic paralysis lies in a contradiction currently affecting the U.S. economy: inflation has only fallen by half, while the labor market remains persistently weak.

The Contradiction Behind Uncertainty

In short, prices are not falling fast enough, while hiring has slowed more than expected. This situation is rare and fraught with issues. To better understand this, imagine running a small business in the U.S. today.

Your raw material costs have risen, rent has increased, and insurance and logistics costs have also gone up. Most importantly, labor costs have surged, and unlike goods or freight contracts, wages are extremely difficult to cut. You might reduce some hours or delay onboarding new employees, but significantly lowering wages is nearly impossible without severe consequences.

You can raise prices, but not by too much, or you risk losing customers. This means you have to tighten hiring plans while absorbing higher costs. If this approach is common across millions of companies, the broader economic picture becomes clear.

Why Is the Job Market Weak?

When profit margins narrow, businesses slow their expansion. They may pause hiring, reduce hours, or freeze new positions. While this is not a collapse like that caused by a recession, it does reflect a gradual weakening of labor demand. Historically, central banks have typically responded to such situations by cutting interest rates, as weak employment signals that economic growth momentum is cooling.

Thus, a weak labor market necessitates lower interest rates, as reducing rates can lower borrowing costs and support investment and consumption. Under normal circumstances, this would be a clear policy path.

Why Hasn't Inflation Decreased?

However, service sector inflation, which accounts for two-thirds of the CPI basket, has been difficult to improve. While goods prices are slowing and housing costs are gradually declining, service prices remain stubbornly high. Since service sector inflation is essentially driven by wages, which rarely decrease, inflation in this category tends to change slowly.

As long as wage costs remain high, businesses will maintain elevated prices, even with weak demand. This persistent pressure indicates that inflation levels are still too high to support rapid or significant easing of policy.

Therefore, inflation suggests a need to slow the pace of production cuts or even adopt a more cautious stance.

The Shadow of Stagflation

The coexistence of weak employment and stubborn inflation resembles the early stages of stagflation. This does not mean that the situation of the 1970s will repeat itself, but the fundamental dynamics are similar: inflation stems from structural costs rather than excess demand, while economic growth momentum quietly weakens.

This pattern typically appears in the later stages of the economic cycle, as the economy transitions from overheating to cooling. The U.S. has experienced a strong surge in inflation since late 2021, peaking at over 9% in mid-2022. In response, the Federal Reserve initiated the most aggressive tightening policy in decades, raising rates from near-zero levels in early 2022 to over 5% by mid-2023. This tightening slowed spending, reduced investment, and ultimately led to a weak labor market.

However, the pace of inflation adjustment is far slower than that of employment adjustment. Wage structures, housing data, and service prices take longer to reflect weak demand, which is why inflation remains high even as hiring numbers decline.

Why Is There Division Within the Federal Reserve—and Why Is It Crucial?

These conflicting data points explain the divisions within the Federal Reserve. Some members are concerned that inflation remains too high to justify further easing, while others warn that delaying rate cuts could push the economy into recession. When the reality pulls policy in two starkly opposite directions, consensus becomes elusive.

For the market, this uncertainty has significant implications. Investors cannot accurately predict the trajectory of interest rates, making it difficult to value risk assets. With uncertainty surrounding the number and pace of rate cuts, capital tends to adopt a defensive strategy. As a result, even though the Federal Reserve has confirmed rate cuts, risk assets struggle to form a clear trend. The Fed has taken dovish actions but has simultaneously sparked hawkish debates, leaving the market in a quandary.

What This Means for Cryptocurrencies

In the short term, the Federal Reserve's recent decisions have provided support for cryptocurrencies. Any rate cuts will improve liquidity conditions, typically favoring risk-taking behavior. This is why digital asset prices surged immediately.

However, mid-term uncertainty will dampen market momentum. Cryptocurrencies rely on clear liquidity cycles, either strong expansion or sharp contraction. What they struggle with most is indecision—and indecision currently dominates the macro environment.

Yet, in the long run, the trajectory remains unchanged. The Federal Reserve has begun to ease monetary policy. The pace may slow, and the timing may adjust, but the direction remains the same. The scatter plot reflects this: the destination has not changed, only the rhythm.

This presents challenges for investors. In a slow easing cycle, how do we time our entries? How do we distinguish noise from real signals? In an environment where even the Federal Reserve is filled with uncertainty, how do we maintain our investment convictions?

Moving Toward the Next Phase

In clear market periods, decisive action yields market rewards; in turbulent times, patience pays off. Today's market environment clearly belongs to the latter. Rather than chasing every market fluctuation, a wiser approach is to understand market cycles, closely monitor turning points, and gradually build positions rather than trading aggressively.

The divisions within the Federal Reserve are not a temporary phenomenon; they reflect deep structural contradictions in the U.S. economy. Until these contradictions are resolved—until inflation shows a clear decline or employment stabilizes—market volatility will remain moderate, liquidity will remain cautious, and risk assets will lack direction.

Economic cycles will eventually shift. And when that shift occurs, those investors who maintain discipline and thoughtfulness will be best positioned to seize the opportunity.

The above content is referenced from @Web3___Ace

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