If the Federal Reserve was operating in a fog when it met last month, the visibility was even worse at this week’s meeting.
The US central bank did as expected and cut the federal funds rate by 25 basis points for the third consecutive time, lowering its target range to a three-year low. It did this amid a rising clash of opinions and projections for next year that reveal just how split and uncertain members of its rate-setting Federal Open Market Committee (FOMC) now are.
While the committee had usually reached decisions by consensus during Jerome Powell’s time as chair, it has been a feature of recent meetings that the Fed was becoming more divided, with the degree of dissent from the majority opinion rising at each meeting.
It happened again this week: Of the 12 voting members, nine voted for the 25 basis point cut, two voted to hold rates steady and one – inevitably Donald Trump’s man, Stephen Miran – wanted a 50 basis point cut, as he has since he was appointed a governor in September.
There are 19 members of the FOMC, which includes seven non-voting regional federal bank presidents. Of that wider group, nearly a third – six – pencilled no cut into their projections.
The central projection for next year is for only one cut. However, seven of the 19 foresee no cuts at all, while eight want at least two 25 basis point reductions. Miran, naturally, thinks rates should be two percentage points, or eight 25 basis point reductions, lower.
The debates within the Fed about whether tariff-induced inflation or a shrinking jobs market is a bigger threat to the economy will intensify.
The increased polarisation of views within the Fed is largely due to differences in opinion over which of the central bank’s two mandates – maximise employment and maintain stable prices – it should prioritise.
The committee members weren’t being helped by a dearth of data because of the record 43-day government shutdown and the Trump administration’s deferral of key data on jobs and inflation from October and November until, coincidentally or otherwise, after their meeting.
What they do know is that the US unemployment rate has been rising, and at 4.4 per cent in September was at four-year highs.
At the same time, the inflation rate has also been edging up, to 2.8 per cent at last sight – well above the Fed’s target of 2 per cent – and is likely to continue to rise as the delayed effects of Donald Trump’s tariffs continue to flow through to goods prices. Services inflation, while tapering slightly in September, has been sticky.
The decision to cut rates signals that the Fed is, for the moment, prioritising jobs over inflation, but the level of dissent and spread of projections for next year underscores how finely balanced that judgment was.
Powell essentially said that, were it not for Trump’s tariffs, the inflation rate would be nearing the Fed’s target.
“If you get away from tariffs, inflation is in the low twos,” he said. “It’s really tariffs.”
“There is no risk-free path for policy as we navigate the tension between our employment and inflation goals. A reasonable case is the effects of tariffs on inflation will be relatively short-lived, effectively a one-time shift in the price level.
“Our obligation is to ensure a one-time increase in the price level does not become an ongoing inflation problem, but with downside risks to employment having risen in recent months, the balance of risks has shifted,” he said.
Powell expects the peak impact of the tariffs on inflation to hit around the first quarter of next year, assuming no new tariffs are announced.
The debates within the Fed about whether tariff-induced inflation or a shrinking jobs market is a bigger threat to the economy will intensify next year as Trump’s efforts to gain greater influence over the central bank gather momentum.
Powell’s term as chair, but not necessarily as a governor, expires in May. Trump has said he will announce his successor either before the end of this year or early next year. The clear front-runner is the director of the National Economic Council, Kevin Hassett, although Trump has been re-interviewing other candidates this week.
Hassett, while saying he would be independent if appointed, has made it clear he is in favour of more rate cuts, which is a key criterion for Trump, who wants borrowing costs cut by at least a further two percentage points to turbocharge growth.
Powell hasn’t said what his plans are when he has to relinquish the chair, declining to comment in response to questions on Thursday about whether he will stay on as a governor until that term ends in 2028.
Trump could put his new chair into the seat currently occupied by Miran or, if Powell resigns as a governor (which has been the norm for past chairs) wait for that vacancy to open – which would, with the governors he appointed in his first term, mean a bare majority of the Fed’s seven governors would be his appointees.
He is also seeking to remove a Biden appointee, Lisa Cook, using the transparent pretext of mortgage fraud, and has mused about challenging other Biden nominees by alleging his predecessor signed the orders appointing them with an autopen, although it is unlikely that would disqualify them even if it had occurred. US presidents, including Trump, have been using autopens for decades.
The White House has made no secret of its desire to have greater influence over the Fed and its rate decisions and, as it has been doing with other key agencies, make it more directly accountable to the administration.
Trump wants the Fed to slash rates to lower the interest costs of government debt. About $US2 trillion ($3 trillion) of debt has been added since Trump regained office. He also wants higher economic growth to boost the Republicans prospects at next year’s mid-term elections.
Trump doesn’t seem to appreciate that the Fed only influences the short end of the US yield curve. The rates that matter – the yields on 10- and 30-year bonds that affect mortgages and other interest rates important to companies and consumers – are set by bond investors. Those rates, which had fallen for most of the year, have been rising in recent weeks.
Trump’s efforts to try and force the Fed to fall in line with his rather unconventional economic ambitions – he sees no reason why the target rate for economic growth, instead of 3 or 4 per cent, shouldn’t be 20 or 25 per cent – may have contributed to the split that has developed within the Fed’s board and the FOMC.
To protect the Fed’s independence, regarded as being central to its credibility and ability to influence financial markets and corporate decision-makers, some board and committee members may feel under pressure to demonstrate their independence of thought.
That could lead to some interesting meetings, with a new board chair, next year.
They’d be even more interesting if the FOMC, which elects its own chair, were to depart from convention and appoint Powell – or a non-Trump appointee – as chair in defiance of Trump and, on the current odds, Hassett.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.
