Fed Policy Divide: Waller Challenges Powell's Rate Cut Approach Amid Government Shutdown

This analysis is based on the Fox Business report [1] published on October 31, 2025, which revealed a significant public policy disagreement within the Federal Reserve. The conflict centers on monetary policy approach amid ongoing data limitations from a government shutdown that has entered its fifth week [3].

Governor Christopher Waller, a Fed chair candidate, directly challenged Chairman Jerome Powell’s “driving in the fog” analogy during a Fox Business “Kudlow” interview. Waller stated, “This fog story has just got to stop… The fog might tell you to slow down. It doesn’t tell you to pull over to the side of the road. You still have to go” [1]. This public rebuke represents a rare instance of a Fed governor openly challenging the chair’s policy rationale, highlighting deepening internal divisions.

The disagreement occurs just days after the Federal Reserve cut rates by 25 basis points to 3.75%-4% on October 29, 2025 [4]. The decision itself showed internal division with a 10-2 vote, where two dissenters held different views - one opposing any cut while another preferred a half-point reduction [4]. Powell’s subsequent “fog” comments significantly tempered market expectations for further easing, with traders reducing December rate cut odds to roughly two-to-one against [4].

Waller’s challenge reveals fundamental philosophical differences in Fed policymaking. While Powell emphasized caution due to data uncertainty, stating that “if there is a very high level of uncertainty, then… that could be an argument in favor of caution about moving” [3], Waller expressed confidence in alternative data sources. He argued, “We actually have a lot of data, just because the official government data hasn’t come out. We have a lot of data” [1].

This policy divide extends beyond methodology to outlook. Waller downplayed tariff concerns, calling their economic impact “minor,” and expressed optimism about inflation returning to target levels [1]. His hawkish stance on continued rate cuts suggests he represents the more dovish faction within the Fed, potentially signaling future policy battles if he becomes chair.

Financial markets demonstrated clear concern about the policy uncertainty. On October 31, major indices declined:

• S&P 500: -0.50% to 6,840.19 [0]
• NASDAQ Composite: -0.91% to 23,724.96 [0]
• Dow Jones Industrial Average: -0.10% to 47,562.88 [0]

However, sector performance revealed significant divergence. Rate-sensitive sectors outperformed with Energy (+2.81%), Real Estate (+1.77%), Financial Services (+1.38%), and Communication Services (+1.15%) showing strength [0]. Conversely, growth-oriented sectors lagged with Utilities (-2.00%), Technology (-1.74%), and Basic Materials (-1.30%) underperforming [0]. This pattern suggests investors are positioning for different monetary policy outcomes based on which Fed faction gains influence.

The government shutdown has created a critical information gap, delaying crucial economic reports including the September jobs report, October jobs report (scheduled for November 7), and October CPI data (scheduled for November 13) [3]. The Fed must now rely on alternative sources including state-level unemployment claims, private surveys, and the Beige Book [3].

Waller’s confidence in these alternative data sources contrasts sharply with Powell’s more cautious approach, raising questions about the reliability and adequacy of non-traditional economic indicators for monetary policy decisions.

1. Policy Uncertainty Volatility
   : The public disagreement between Fed officials creates significant market uncertainty about future rate policy. Historical patterns suggest such leadership disagreements typically lead to increased market volatility across all asset classes.

2. Data Gap Complications
   : The prolonged government shutdown may continue limiting economic visibility, making policy decisions increasingly dependent on alternative data sources whose reliability remains unproven at scale [3].

3. Leadership Transition Impact
   : With Powell’s term expiring in May 2026, the selection process could dramatically alter Fed policy approach. Waller confirmed he would accept the position if offered: “If the president asks me, I will serve. He asked me once before, and I said yes. … I’ll say yes again” [1].

Decision-makers should track:

• Government shutdown resolution timeline and data flow restoration [3]
• December 9-10 FOMC meeting signals regarding data uncertainty impact [4]
• Fed chair selection process and candidate policy positions [1]
• Alternative data source reliability and accuracy [1]

The Federal Reserve faces a critical juncture with internal policy divisions becoming public just as data limitations from the government shutdown complicate decision-making. Waller represents a more aggressive rate-cutting approach, contrasting with Powell’s data-driven caution. This divergence affects market expectations, with December rate cut probabilities now roughly two-to-one against [4].

The sector performance divergence indicates markets are pricing different policy scenarios, with rate-sensitive financials and real estate outperforming while technology and utilities lag [0]. The leadership transition adds another layer of uncertainty, with Waller’s confirmation of his willingness to serve if asked [1] suggesting potential significant policy shifts if selected.

The reliability of alternative data sources remains a key question, as the Fed navigates unprecedented data gaps while maintaining its dual mandate of price stability and maximum employment. The resolution of these factors will significantly influence monetary policy trajectory and market dynamics through 2026.