The Federal Open Market Committee maintained its policy rate between 3.5% and 3.75% on Wednesday while updating its statement to acknowledge elevated economic uncertainty associated with events in the Middle East.
Beyond its decision, though, there is clearly a sense of discontent brewing on the FOMC given the sustained attack on central bank independence by the White House to obtain rate cuts when the strength of the economy suggests otherwise.
To begin with, Federal Reserve Chair Jerome Powell, in his last meeting as chair, announced he would remain a member of the Board of Governors but would keep a low profile, which we think will be difficult.
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He is a voting member of the FOMC and anytime he speaks it will carry far more weight than other members until he leaves the board.
His tenure on the board ends in January 2028.
Second, that discontent on the committee has boiled over, resulting in four dissenting votes on the statement and implying a difficult policy path ahead.
Governor Stephen Miran voted to cut rates.
But three other members—Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan—dissented in favor of not reinstating an easing bias into the statement.
One gets the sense that those three dissenters are signaling a willingness not only to protect central bank independence but also to resist what may be a bias toward rate cuts from the incoming Fed chair, Kevin Warsh.
I run four different models that estimate the optimal Fed policy rate, and none of the models implies that rate cuts are appropriate.
In some respects, the three members’ dissent reflects where the market is and is an acknowledgement of a solid economy that, if anything, calls for a neutral bias on rates.
In Powell’s press conference afterward, he indicated that the number of Fed officials who favor more neutral language in the statement has increased and added that the discussion was vigorous.
The question is, does this reflect the opinions of the three members alone, or do those members speak for a working majority that will push back more vigorously against rate cuts.
The takeaway
Powell’s final meeting as chair likely foreshadows what will be a period of discontent among members of the Federal Open Market Committee over the direction of policy.
The debate is taking place amid a broadening and deepening supply shock through energy markets that carries significant risk of causing a persistent bout of inflation just as a new chair, who presumably has a bias toward rate cuts, is taking over.
