A Fed Post ... Post Fed
A Split Decision
As my friend and colleague, Justin Wolfers, economics professor at THE University of Michigan, noted on MSNBC yesterday, we are seeing a type split among Fed policy-makers that we haven’t seen in a decade or more … one Fed governor voting to cut rates by a larger amount than decided by the Fed and one district Fed president voting for no change at all.
Stephen Miran, recently appointed to the board by President Trump, voted for a half-point cut in rates, as he did at the last meeting, while Kansas City Fed president,Jeffrey Schmid, voted for holding rates steady.
A schism among the high priests of monetary policy.
The split is unusual as the Fed often works to promote a consensus view on policy decisions and may well underscore deeper rifts among policy-makers, some of whom are increasingly worried about deterioration in the labor markets while still others are concerned that inflation remains stubbornly stuck above the Fed’s stated 2% target.
In the short-run, even more concerning is the fact that the Fed is flying blind … thanks to the government shutdown which is preventing the Bureau of Labor statistics from collecting, compiling and releasing important information on both employment and inflation.
It is altogether possible the Fed may have incomplete, or no new data at all, when it makes its next decision on rates about six weeks from now.
Fed chair, Jay Powell, undercut market expectations for another rate reduction in December, which investors were banking on, by saying that another cut was far from assured at the next meeting.
Bond market interest rates, as a result, rose yesterday and continue higher this morning with the yield on the 10-year Treasury note now at 4.1%.
It was sneaking below 4% only a couple days ago amid expectations of a continued series of rate cuts going into 2026.
The Fed, in its policy statement yesterday, indicated that, for the moment, it is more worried about a weakening labor market than the stickiness of inflation … but that may be a fleeting concern.
True, we’re seeing the pace of announced job cuts pick up … 30,000 at Amazon, 48,000 at UPS and so on … but there’s also no indication that inflation is falling rapidly from the current 3% level.
Even with the so-called “trade truce” announced this morning by President Trump between the U.S. and China, import taxes on Chinese goods were reduced, not eliminated, threatening to keep import prices higher than they were a year ago … grocery prices, among other consumer items, are not yet declining nor showing any signs of doing so.
Tariffs on other nations remain in place until the Supreme Court decides in the next couple weeks whether the law behind the imposition of emergency import taxes is legal.
Still, a wide variety of import taxes will remain not only propping up prices but also threatening to snarl supply chains in key industries that are already showing signs of strain.
This creates a conundrum for the Fed as there is an additional issue that complicates policy … GDP is growing faster than expected thanks to the massive amounts of AI infrastructure spending and the strength of upscale consumers who continue to spend freely, as well, propping up the largest component of GDP ... consumer spending which accounts for nearly 70% of economic growth.
The Atlanta Federal Reserve’s GDPNow model pegs 3rd quarter growth at 3.9%, well above what one would expect to see with an obviously softening labor market.
All of this supports the notion that the Fed should stand pat for a meting or two, unless or until there’s more data to analyze, and unless or until the labor market weakens further and inflation falls faster.
Conversely, if labor markets begin to firm and inflation moves above 3% … that represents a set of developments which could induce the Fed not only to stop cutting rates but also to change course and take back a cut or two.
That could derail the stock market which currently, today’s modest pullback notwithstanding, at or near all-time highs and meaningfully overvalued by almost every metric.
This is going to be an increasingly tricky time for the Fed, for another reason as well, as Jay Powell’s successor is likely to be named before the end of the year essentially making Powell a lame duck.
How that affects institutional thinking at the Fed remains to be seen.
However, further rate cuts in the absence of a more defined economic environment could raise the risk of a re-acceleration in inflation while, potentially, doing little to stop some of the structural shifts in the labor market created by mass deportations, AI implementation and trade dislocations.
The situation reminds me a bit of a line from the Will Farrell film, “The Campaign,” in which his congressional rival, Marty Huggins, (played by Zach Galifianakis) advocates bringing a broom to Washington because, “it’s a mess.”
You can say that about what the Fed’s going to look like over the next few months, if not years, if employment weakens while inflation remains firm which could easily prompt further infighting at the Fed and a much greater degree of uncertainty over policy than we have seen for quite a long time.