UPDATE: Tensions among Federal Reserve officials have escalated, throwing December’s anticipated rate cut into uncertainty. Diverging views were publicly revealed at last week’s Federal Open Market Committee meeting, where officials voted 10 to 2 to lower borrowing costs by 0.25 percentage points, but the rationale behind the dissenting votes has raised eyebrows.
Newly appointed Fed Governor Stephen Miran favored a more aggressive 0.50 percentage point cut, while Kansas City Fed President Jeffrey Schmid opposed any reduction. Fed Chairman Jerome Powell acknowledged this unusual divide, stating, “A December rate cut is not a foregone conclusion. Far from it,” indicating a potential shift in monetary policy direction.
As of Monday, markets now assign only a 65 percent chance of a rate cut next month, down from over 90 percent before Powell’s remarks. This swift change highlights the immediate impact of internal Fed disagreements and a backdrop of high inflation coupled with a weakening labor market.
The discourse among Fed officials is intensifying as they prepare for the December meeting. At the heart of their debate lies a critical question: how to balance the risk of a softening labor market against persistent inflation, a challenge further complicated by the ongoing government shutdown that has halted vital economic data releases.
Miran has emerged as the Fed’s most dovish voice, advocating for rate cuts to support employment. “I think policy is too restrictive,” he stated during a Yahoo Finance interview, arguing that current rates are too high given the state of the labor market. Following a private payroll report revealing that U.S. companies added 42,000 jobs in October, he called the data “a welcome surprise.” However, he maintained that moderating wage growth justifies a reduction in rates.
Conversely, several Fed officials have adopted hawkish positions. President Lorie Logan of the Dallas Fed, President Beth Hammack of the Cleveland Fed, and President Raphael Bostic of the Atlanta Fed have all expressed concerns regarding further easing in light of high inflation levels. Austan Goolsbee, President of the Chicago Fed, while supporting last week’s cut, admitted he was “nervous about the inflation side of the ledger,” emphasizing the need for caution as inflation remains above target.
In a nuanced take, Governor Lisa Cook highlighted the tension between the Fed’s dual mandate of maximum employment and stable prices. Speaking at the Brookings Institution, she warned that maintaining high rates could sharply deteriorate the labor market, but lowering them excessively could disrupt inflation expectations. She described the upcoming December meeting as “live” for potential cuts but refrained from committing to any decision.
Mary Daly, President of the San Francisco Fed, echoed these sentiments, stating that last week’s cut was “insurance” against labor market weaknesses while remaining open-minded about the December meeting. She cautioned against prioritizing inflation reduction at the expense of millions of jobs, underscoring the delicate balance the Fed faces as it navigates these turbulent economic waters.
The situation remains fluid, with investors and analysts closely monitoring the Fed’s next moves. As the December meeting approaches, all eyes will be on how these internal conflicts influence monetary policy and ultimately affect the economy. Expect further developments as Fed officials clarify their positions in the coming weeks.
