Federal Reserve policymakers are deeply divided on the direction of interest rates. Their worries are rooted in the overall precariousness of the U.S. economy, as well as in the effects of President Donald Trump’s combative trade policies. This division represents a profound change in the governing approach of Jerome Powell, Chair of the Federal Reserve. After all, he used to really flourish in an environment that prized consensus.
The Federal Reserve’s most recent meeting showed deep divisions between the bank’s members. For the first time in over thirty years, not just one Fed governor, but a majority of them, consistently dissented on policy decisions. Now, governors Michelle Bowman and Christopher Waller —also appointed by Trump—are advocating for deeper rate cuts to start as soon as this July. Conversely, other members are staunchly in favor of raising the rate to combat inflationary pressures.
The Challenge of Consensus
Getting the economics and politics right will not be easy for Jerome Powell. He’ll be taking over from Ben Bernanke and Janet Yellen, both of whom helped to establish a consensus at the central bank. Now Powell finds himself at difficulty, which poses serious risks to derailing this participatory and collaborative approach. Today’s continuing fractures portend future challenges in guiding smart policy choices.
The recent government shutdown has further complicated what are already difficult economic times. It has stopped the publication of important economic figures, putting millions in limbo. Federal Reserve officials are flying blind on key inflation and employment numbers. This lack of information critically limits their ability to make data-informed decisions.
Boston Fed President Susan Collins expressed caution during the October meeting, stating, “I would be hesitant to ease policy further, and that it would likely be appropriate to keep policy rates at the current level for some time to balance the inflation and employment risks in this highly uncertain environment.”
Diverging Views on Interest Rates
The opposing perspectives inside the Federal Reserve mirror a wider sense of alarm at the dangerous course of U.S. economic policy. While Bowman and Waller advocate for cutting interest rates to stimulate growth, other influential members like Collins emphasize the need for restraint.
Former Trump appointee on the Treasury’s International Finance office Stephen Miran also recently laid out a case against keeping monetary policy too restrictive. He warned, “If you keep policy this tight for a long period of time, then you run the risk that monetary policy itself is inducing a recession.” Miran further added, “I don’t see a reason to run that risk if I’m not concerned about inflation on the upside.”
These contrary philosophies of engagement, though, indicate a deeper problem. Until these intellectual disagreements are reconciled, the Fed’s effectiveness and credibility will likely be called into question. As Derek Tang noted, “If these intellectual disagreements aren’t able to be reconciled, then that could affect the Fed’s effectiveness and credibility.”
Implications of Economic Uncertainty
The increasing uncertainty about the future of the U.S. economy has raised the stakes on these U.S. interest rate policy discussions. This year, all but one of those four regional presidents voted to keep that predictable rate so inflation would continue being controlled. This political fracture within the Fed underscores the difficulty of addressing overarching issues in the economy amidst political constraints.
Alberto Musalem urged caution in easing further, stating, “We need to proceed and tread with caution, because I think there’s limited room for further easing without monetary policy becoming overly accommodative.” This attitude captures an increasing fear among regulators to pursue policy measures that will somehow backfire to produce unexpected and undesired adverse economic effects.
Powell is clearly serious about policy and how it will/can be directed going forward. He must navigate competing perspectives and address outside influences that could disrupt economic security. The success of his efforts might reach further than you might expect given his direct control as he tries to bring order to a splintered board.