150 basis points vs 25 basis points: Can Federal Reserve Board Member Mullan's aggressive stance sway interest rate cut expectations?

Federal Reserve Board Member Milan recently issued a strong signal of rate cuts, expecting a 150 basis point reduction this year to boost the labor market. This aggressive stance contrasts sharply with market consensus and also reflects deep internal divisions within the Federal Reserve regarding policy direction. Milan indicated that the core inflation rate may remain around 2.3%, with about 1 million Americans currently unemployed, but their unemployment would not cause unnecessary inflation, providing a theoretical basis for further rate cuts.

A True Reflection of Internal Divisions at the Federal Reserve

Milan’s position is not an isolated voice but a concentrated expression of the dovish and hawkish factions within the Fed. According to the latest news, the December Federal Reserve meeting resulted in a 9-3 vote supporting a 25 basis point rate cut, the most dissent since 2019. Among the three dissenting members, Milan even called for a 50 basis point cut, while the other two preferred to keep rates unchanged.

Behind this voting split lies fundamental differences in economic outlooks. Milan believes the current federal funds rate (3.5%-3.75%) is significantly above the neutral rate (estimated median at 3%), and this “tight” policy is dragging on economic growth. Conversely, hawkish officials like Richmond Fed President Barkin argue that rates are already in the neutral zone and should be approached cautiously.

The Aggressiveness of a 150 Basis Point Rate Cut

To understand the aggressiveness of Milan’s proposal, it’s important to compare it with market expectations. According to the latest data, CME shows an 85.1% probability of holding rates steady in January, while the December Fed dot plot projected only a 25 basis point rate cut for the entire year. This means Milan’s expected 150 basis point cut is six times the market consensus.

Several key points underpin this large discrepancy:

• Milan has been the most aggressive advocate for rate cuts since becoming a Fed Board member last September.
• His term is ending this month, possibly making this his final policy recommendation.
• His personal stance does not necessarily represent the collective view of the Fed, and adoption is limited.
• Fed officials explicitly stated in the minutes that even members supporting rate cuts consider it a “delicate balance.”

The Labor Market as a Breakthrough for Rate Cuts

The 1 million unemployed people highlighted by Milan is a key reason for his push for significant rate cuts. He pointed out that if these unemployed individuals re-enter the workforce, it would not cause unnecessary inflation because the core inflation rate is already close to the Fed’s 2% target. This logic aligns with the Fed’s dual mandate—controlling inflation while maintaining maximum employment.

In contrast, hawkish officials are more concerned about inflation stickiness and economic resilience. They believe the U.S. economy will demonstrate unexpected resilience through 2025, making rate cuts less urgent than dovish advocates suggest.

How the Market Interprets This Internal Division

This public split within the Fed has complex implications for the markets. On one hand, Milan’s aggressive stance provides psychological support to bullish investors and reinforces expectations of future easing. On the other hand, the 85.1% probability of holding rates steady in January indicates that the market does not expect a near-term policy shift.

A key focus will be upcoming economic data. Milan himself mentioned that data are expected to continue indicating that rate cuts are appropriate, meaning the trajectory of inflation and employment data will be decisive. If data support rate cuts, the Fed may gradually lean dovish; if resilience persists, hawkish caution could prevail.

Summary

Milan’s expectation of a 150 basis point rate cut this year represents an aggressive voice within the Fed, but this outlook differs significantly from market consensus. The deep internal divisions within the Fed reflect genuine disagreements over economic prospects and suggest considerable uncertainty about future policy directions. Both crypto markets and traditional asset markets should closely monitor upcoming economic data releases and further statements from Fed officials. The policy shift’s general direction is becoming clearer, but the specific pace and magnitude still require time to confirm.