As the Federal Reserve looks ahead to its next meeting in December, it does so with clear reluctance. There are major new changes coming with interest rates and in leadership. Fed Chair Jerome Powell has indicated that any further rate reductions are uncertain, stating that a decrease “is not a foregone conclusion, far from it.” This announcement comes on the heels of increasingly common speculation about the Federal Reserve’s monetary policy. It’s a big deal, given that the economy was projected to only grow at a 1.8% annual rate.
As the Federal Reserve gets ready for this important meeting, it is going through a major change in its leadership. In May, a new Chair will be coming on board. Former White House economic adviser Kevin Hassett is quickly becoming a top contender for the job. If appointed, Hassett would further entrench Trump-era influence. This would leave only two of the seven members on the Board of Governors as not being Trump appointees.
Along with this, market expectations about the future path for interest rates have largely stayed in check. The effective federal funds rate is at 3.89%. Indeed, it’s nearly on par with the interest on excess reserves (3.90%). This results in a small spread of only 1 basis point. The markets are only pricing the Fed to cut a further 14 basis points. This very optimistic forecast is entirely dependent on their meeting in March.
Uncertain Monetary Policy
Analysts were left surprised at an upcoming Federal Open Market Committee (FOMC) meeting in October. They argue that press conferences are a wild card for entities who oppose the dollar. With dissent already clear within the Fed, it’s hard to expect a more dovish pivot from Powell. The inflation narrative is still very much front and center, however, particularly with possible upside risks coming from a low-hire, low-fire economy.
Expectations have changed tremendously as stakeholders look ahead to the meeting coming this December. Recent minutes showed that “many” members were moving in the direction of opposing a cut at this point. Powell’s caution reflects concerns about inflation and economic growth, leaving many to wonder how the Fed will navigate these challenges.
Some forecasters see a 25 bp cut occurring in December. They warn that the decision may go down the middle, with four members perhaps preferring to leave the existing rate where it is. The inflation backdrop should get somewhat better over the next few months. This makes the argument for those calling for cuts stronger than ever.
Leadership Transition and Its Impact
The impending change in leadership at the Fed raises questions about future monetary policy direction. Kevin Hassett, another likely Powell successor, has pushed similar ideas. Given that his appointment would shape the Board’s decisions on interest rates and broad economic strategy for years to come, the effect would be potentially profound. The Fed’s Board of Governors is in the midst of historic transition. It is no small feat that every one of the 12 regional Fed presidents will face reappointment in February.
Hassett’s background in economic policy suggests he could advocate for a more aggressive approach to interest rates if inflation pressures persist. This possible reversal would be a welcome alteration of the previous market’s response to a forthcoming announcement. It will change what people expect from monetary policy—if it works.
“Is not a foregone conclusion, far from it.” – Jerome Powell
The Fed is reshaping its leadership and responding to volatile economic indicators. Supply chain participants across the markets will be looking for signals of policy pivots. Read full report The economic picture is constantly changing, as diverse sectors continue to drive job-creation and expand our economy.
Job Growth and Economic Indicators
In the United States, more than 90% of new jobs are created by fast-growing industries. This list is rounded out by leisure and hospitality, government, private education, and healthcare services. This concentration serves to underscore our greater reliance on specific industries to drive economic vitality. Consequently, it could influence the Fed’s decision making on interest rates in coming months.
The resilience of these sectors amidst broader economic uncertainties has led to a complex interplay between job creation, inflation rates, and monetary policy. The Fed’s strategy will likely reflect these dynamics as they consider the impact on consumer spending and overall economic growth.