At the start of 2025, the Federal Reserve has entered a new round of rotations for the Federal Open Market Committee (FOMC) voting members. Chicago Fed President Austan D. Goolsbee, Boston Fed President Susan M. Collins, St. Louis Fed President Alberto G. Musalem, and Kansas City Fed President Jeffrey R. Schmid will replace the four rotating members of 2024 and become the new voting members for 2025. Notably, among these four new members, two are considered "hawks," one is a "dove," and one is neutral. This change may further intensify internal divisions within the Fed, introducing more uncertainty into monetary policy decisions for 2025.

Stance and Background of New Voting Members

In terms of their backgrounds, Goolsbee and Collins come from academia, while Musalem and Schmid have rich industry experience. Goolsbee, who served as an economics professor at the University of Chicago and as Chairman of the Economic Advisory Council during the Obama administration, is seen as a "dovish" member. He advocates for appropriate interest rate cuts in 2025 to avoid overly slowing down the labour market.

In contrast, Musalem and Schmid have a more "hawkish" stance. Musalem stated in December 2024 that slowing down the pace of rate cuts in 2025 would be appropriate, citing potential inflationary risks. Schmid tends to avoid large rate cuts, arguing for cautious policy adjustments to prevent market volatility. Collins adopts a relatively neutral stance, emphasizing that rate cuts should be data-driven rather than following a preset path.

Internal Divisions May Widen

In 2024, the Fed cut rates three times, but two of these cuts were not passed unanimously, revealing internal divisions. For example, Cleveland Fed President Loretta Mester opposed rate cuts in December 2024, arguing that rates should be kept unchanged.

With the addition of new voting members in 2025, the distribution of stances within the FOMC will become more dispersed. Bloomberg analysis points out that the "hawk-dove spectrum" of the 2025 FOMC members will extend to both extremes, with fewer neutral members, potentially leading to more divisions. Barron's also suggests that the inclusion of these new members may tilt the Fed's decisions towards a more "hawkish" stance, especially as inflation remains above the 2% target.

Inflation and Economic Outlook Complexity

In December 2024, the Fed lowered the benchmark interest rate by 25 basis points to 4.25%-4.5%, hinting that there may only be two rate cuts in 2025. Fed Chairman Jerome Powell emphasized that future rate cuts will be more gradual and dependent on whether inflation continues to fall.

However, the complexity of the inflation outlook adds difficulty to the Fed's decision-making. The December 2024 economic projections showed that 15 out of 19 FOMC members saw upside risks to inflation, a significant increase compared to previous projections. Furthermore, potential policy adjustments under the Trump administration, such as higher tariffs and tax cuts, could further push inflation up and restrict the labour market.

Market Participants' Response Strategies

In 2024, the Fed's rate-cutting cycle was seen by the market as a "painful" easing cycle, with 30-year mortgage rates rising and 10-year Treasury yields increasing sharply. Given the potential for intensified internal divisions within the Fed and a complex economic environment, market participants need to adopt flexible response strategies. Investors should closely monitor the Fed's policy signals, especially the public remarks of the new voting members and the release of economic data.

Additionally, market participants should pay attention to changes in the global economic environment, particularly policy adjustments in major European and Asian economies. Increasing geopolitical risks could significantly impact market sentiment, and investors should remain vigilant and adjust their portfolios flexibly.

Conclusion

The rotation of the Fed's voting members in 2025 introduces new variables into monetary policy decision-making. With more "hawkish" members joining, internal divisions within the FOMC may widen, particularly in the context of inflation and an uncertain economic outlook. Market participants should closely follow the Fed's policy signals to navigate potential volatility and challenges. Although internal divisions may complicate decision-making, they also provide space for the expression of diverse viewpoints, helping to assess economic risks more comprehensively.

In a challenging environment, Fed policy-making will become more data-driven, and market participants will need to stay flexible, actively responding to emerging risks and opportunities. In 2025, global economic uncertainty and internal divisions within the Fed will bring more challenges to the market, but they will also present new opportunities for investors.