Jerome Powell’s era of consensus at the Fed is over
Federal Reserve Chair Jerome Powell leaves a press conference in Washington, DC, on October 29. – Kevin Lamarque/Reuters
Federal Reserve policymakers are split over whether they should continue cutting interest rates, ending a period of consensus that has defined Chair Jerome Powell’s leadership of the central bank.
The Fed’s latest decision to lower interest rates by a quarter point in late October was opposed by two policymakers: one official who preferred to hold rates steady, and another who wanted a larger rate cut instead. A pair of opposing dissents had not been seen since 2019. Earlier this year, more than one Fed governor cast a dissenting vote for the first time in more than three decades.
The growing divide among Fed officials has spilled out into public speeches in recent days, presenting a challenge for Powell as he works to retain consensus among colleagues.
That division is a direct result of the uncertainty in the US economy and questions around the impacts of President Donald Trump’s aggressive trade policy. The murky economic outlook has divided the rate-setting committee, which is tasked by Congress to keep the labor market intact and to tame inflation. Some Fed officials want to continue to focus on reining in higher prices, believing that tariffs could jack up inflation. Other policymakers say it’s time to prioritize a weakening labor market.
Economists say the potential implications of a divided Fed are a mixed bag, but nonetheless represent an extraordinary shift in the politics of the world’s most powerful central bank.
“If these intellectual disagreements aren’t able to be reconciled, then that could affect the Fed’s effectiveness and credibility,” said Derek Tang, an economist at LHMeyer, a monetary policy analytics firm.
“In the next decade or so, the Fed could become like the Supreme Court, with people voting along party lines,” he said.
As leader of America’s central bank — and chair of its influential rate-setting committee — Powell now has his work cut out for him, but the outcome may be beyond his control.
Over the past few decades, the Fed chair has increasingly played a key part in shepherding the central bank’s policy decisions through careful consensus-building efforts.
The Fed chair’s role of seeking unanimous agreement notably began under former Fed Chair Ben Bernanke, according to Jon Hilsenrath, a long-time Fed watcher and senior adviser at brokerage firm StoneX Group. It involves regular meetings with members of the Fed’s seven-person Board of Governors and the 12 regional Fed bank presidents.
“Powell built on what Bernanke and (former Fed Chair Janet) Yellen did,” Hilsenrath said. “But this kind of breakdown in consensus is beyond Jay Powell or his leadership.”
In a post-meeting news conference after the Fed announced its October decision, Powell said there were “strongly differing views” among officials on how to move forward. He had previously characterized the division as merely a “healthy debate.”
Dissents from Fed officials are expected to persist through the final meetings of Powell’s term as chair, which ends in May. That could make it difficult for Wall Street to know what to expect from the Fed: The chances of a December rate cut are currently a coin toss, according to futures.
The Fed’s policymaking these days has indeed gotten much more complex: During the pandemic-fueled recession in 2020, it was clear the Fed needed to lower borrowing costs aggressively — and keep rates at ultra-low levels — to shore up a battered economy. Similarly in 2022, it was obvious the Fed needed to hike rates aggressively to tamp down the fastest inflation in four decades.
At the same time, a more divided Fed could bode well for its credibility.
“The market might also come to a conclusion that they’re not going to make extreme choices or lock themselves in to decisions that could lead the economy and the financial system in the wrong direction,” Hilsenrath said. “If there’s more disagreement, then that kind of moderates the Fed’s behavior.”
Assessing the economy became even harder during the government shutdown, which was the longest in American history and suspended the release of weeks of economic data. At their October meeting, Fed officials were left without key readings on inflation and employment, metrics that are vital for policymakers when considering how to address their dual mandate.
With the government now reopened, an upcoming deluge of data could easily tilt the scales in either direction.
On the side of holding rates steady to tame inflation are three of the four regional presidents who vote on policy this year. Kansas City Fed President Jeffrey Schmid, who dissented in October and preferred no rate cut, explained in a statement that his decision came about partly because people in his district have voiced “widespread concern over continued cost increases and inflation.”
His colleague Alberto Musalem, president of the St. Louis Fed and also a voter this year, said this week: “We need to proceed and tread with caution, because I think there’s limited room for further easing without monetary policy becoming overly accommodative,” at a Thursday event in Evansville, Indiana.
On Wednesday, Boston Fed President Susan Collins said she 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.”
Meanwhile, the opposing camp includes officials who believe the Fed should continue to lower rates, primarily because they don’t see tariffs as likely having a persistent impact on inflation. They also believe the labor market is at risk of falling off a cliff if rates aren’t lowered quickly enough.
Fed Governor Stephen Miran, who has taken leave from his role as head of Trump’s Council of Economic Advisers in order to fill a temporarily vacant seat on the central bank’s Board of Governors, dissented on the Fed’s decision last month to lower rates by a quarter point, instead backing a larger, half-point cut. In his latest remarks, he argued that borrowing costs are exerting more pressure on the economy than most think and that inflation is bound to slow “substantially” regardless.
Miran is joined by Fed governors Michelle Bowman and Christopher Waller, also Trump appointees, who have called for rate cuts starting in July. They believe that with inflation close enough to the Fed’s target rate of 2%, the primary concern should be the softening labor market.
“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 told The New York Times in an interview that published on November 1. “I don’t see a reason to run that risk if I’m not concerned about inflation on the upside.”
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