– Divergent Views Have Emerged But for Now Officials United on Need For Patience
By Steven K. Beckner
(MaceNews) – As the Federal Reserve approached its mid-year monetary policy meeting, Fed officials have given few signs this week that they are prepared to change their “moderately restrictive” interest rate settings any time soon.
While officials are largely united on the need to stand pat for now, divergent views have emerged on how the Fed should proceed going forward.
Fed officials have spoken carefully amid heightened uncertainty about how the Trump administration’s trade and other policies will affect economic and financial conditions.
Minneapolis Federal Reserve Bank President Neel Kashkari, a voting member of the Fed’s policy-making Federal Open Market Committee, said Tuesday the FOMC should hold rates steady until it becomes more clear how tariff and other policies will affect the economic outlook.
As things now stand, understanding the impact of Trump policies is like “driving in the fog,” Richmond Fed President Tom Barkin said the same day.
While some Fed officials have indicated a willingness to ease policy to counter softening of economic activity and employment, others have shown greater concern about inflationary impulses arising from tariffs.
New York Fed President John Williams, for instance, said Wednesday the Fed must be ready to “respond relatively strongly” if inflation persistently deviates from its 2% target and inflation expectations become unhinged.
Chicago Fed President Austan Goolsbee, another FOMC voter, said Thursday that interest rates could go lower if the economy returns to a state of full employment and declining inflation, but said that currently doubts about the impact of tariffs is making decision making difficult for business leaders and policymakers.
San Francisco Fed President Mary Daly echoed Chair Jerome Powell in calling the economy “solid” and saying monetary policy is “in a good place” to respond to economic developments once those become more clear but said that for the time being the Fed has “plenty of time” to decide what that response should be.
Still later Thursday, Dallas Fed President Lorie Logan suggested the Fed may need to stay on hold for months, saying it could “take quite some time” for the FOMC to diagnose which way the “balance of risks” is going.
President Trump, meanwhile, has exerted considerable pressure on the Fed to lower rates, but his comments, not to mention insults, haven’t made Powell and company any more willing to ease credit sooner than they think appropriate. To a man (or woman) officials have declared their reluctance to alter what they consider an appropriate and “well positioned” monetary stance until they achieve “greater clarity” or less “uncertainty’ about how Trump trade and other policies will affect the economy.
Several officials have, however, allowed for the possibility that Trump deal-making with various trading partners could clear the air and brighten the economic outlook.
Mirroring those more hopeful sentiments, Wall Street began the week with a major rally after the administration delayed imposition of a 50% tariff on European Union products. Amid concern about federal deficit spending and the national debt, bond yields remain elevated, but are down from their peak. The 10-year Treasury note yield, which spiked to 4.6290% on May 22, traded down to 4.42% Thursday.
When the FOMC last met on May 7, it voted unanimously to leave the federal funds rate unchanged in a target range of 4.25% to 4.5% for the third straight meeting, after cutting its policy rate 100 basis points over the last three meetings of 2024.
The FOMC continued to describe economic activity and labor markets as “solid,” but took note of “further” increases in uncertainty. It altered its balance of risks language to warn that “the risks of higher unemployment and higher inflation have risen.” Referencing that new language, Powell warned, “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.”
But for now, he said, “we are not in this situation,” Indeed, “the economy is growing at a solid pace, the labor market appears to be solid. Inflation is running a bit above 2%. So it’s an economy that’s been resilient and in good shape….”
“And so, we think that leaves us in a good place to wait and see,” Powell said. “We don’t think we need to be in a hurry. We think we can be patient.”
Minutes of the May 6-7 FOMC meeting reconfirmed, if there was any doubt, that there is no rush to cut rates: “(P)participants agreed that with economic growth and the labor market still solid and current monetary policy moderately restrictive, the Committee was well positioned to wait for more clarity on the outlooks for inflation and economic activity. Participants agreed that uncertainty about the economic outlook had increased further, making it appropriate to take a cautious approach until the net economic effects of the array of changes to government policies become clearer.”
The minutes did, however, reveal some divisions among participants, revealing that “almost all participants commented on the risk that inflation could prove to be more persistent than expected” and that “a few participants additionally noted that higher uncertainty could restrain business and consumer demand and that inflationary pressures could be damped if downside risks to economic activity or the labor market materialized.”
There doesn’t seem to have been much change in attitudes since the FOMC last met, judging from Fed officials’ comments this week.
Nor has the outlook clarified decisively. Almost daily, new wrinkles in multi-faceted trade negotiations with a host of nations has caused the economic outlook to change, either for better or worse – making it hard for the FOMC to forecast.
Kashkari openly talked about what he called “a healthy debate” among Fed officials in Tuesday remarks in Tokyo. While some of his colleagues are inclined to “look through” presumed temporary tariff impacts, Kashkari said he and others worry trade disputes could take “months or years” to resolve and that “there could be tit-for-tat tariff increases as trading partners respond to one other.”
He advocated leaving rates unchanged “until there is more clarity on the path for tariffs and their impact on prices.”
“I find these arguments more compelling given the paramount importance I place on defending long-run inflation expectations,” Kashkari added.”
Others, such as St. Louis Fed President Alberto Musalem, have preferred to speak of alternate scenarios, in which the Fed might choose to be more or less restrictive depending on the strength of growth and employment; the persistence of inflation and the level of inflation expectations
A number of officials, including Powell himself, have spoken of taking a
“balanced approach” should the Fed’s dual mandate goals diverge, If for example unemployment were to rise above what the Fed considers its longer term estimate of the full employment level even as inflation exceeds target, the Fed would tend to focus on fighting joblessness instead of inflation.
Like others, Williams stressed the nebulous nature of current conditions Wednesday saying, “Uncertainty has risen pretty significantly.” But he seemed to put more emphasis on inflation risks.
“We have to be very aware that inflation expectations could shift in any way that could be detrimental,” the FOMC vice chairman said in Tokyo. “You want to avoid inflation becoming highly persistent because that could become permanent, and the way to do that is to respond relatively strongly” if inflation starts to become more elevated relative to the 2% target.
Goolsbee also stressed the high level of uncertainty he and his colleagues are having to cope with at a Mackinac (Michigan) Policy Conference.
Ordinarily, the Fed bases monetary policy decisions in whatever trade or fiscal “conditions” it is presented with, he said, but added, “it’s a lot easier to deal with conditions when not so much uncertainty.*
With trade and other policies in flux, Goolsbee said business contacts are telling him “this is a pencils down moment in the economy..we can’t keep taking the test..we’re just going to put our pencils down…”
“We need some consistency,” he added.
Looking ahead, Goolsbee anticipated an eventual lowering of interest rates once the trade situation stabilizes. “If on the back end of this thing…we can go back (to) stable full employment and inflation trending down..on path to our 2% target…..rates can come down to where they would eventually settle.”
That “eventual” level rate is reflected in the so-called “dot plot,’ he said, referring to the FOMC’s quarterly Summary of Economic Projections. In the March SEP, FOMC participants foresaw the funds rate falling to 3.1% by the end of 2027. They estimated the longer run funds rate at 3.0%.
“In the long run, rates are well below where rates are if we can get the dust out of the air,” Goolsbee observed, but “the longer we go contemplating big changes like the ones being discussed…the more that fades into the background.”
Asked about Trump’s call for lower interest rates, he said he takes the President’s remarks as a desire for lower mortgage and other long-term interest rates, but said “the Fed doesn’t control” such rates.
Regarding the risks of “stagflation,” Goolsbee said a combination of higher inflation and higher unemployment is the toughest scenario to face a central bank,” because “there’s not an automatic playbook.”
But while “stagflation is the direction,” he said “it’s not the 1970s’ stagflation.”
Though cautious and uncertain like her colleagues. Daly was upbeat about the economy’s prospects when answering questions at the Oakland, California Rotary Club, saying “inflation is coming down with good growth and solid labor markets. We have a reasonably good economy that has its footing under it.”
She called the economy “solid” and likewise said “the labor market is in solid shape. It feels like firms can find the workers they need, and workers can find jobs they want, though it may take longer to find job.”
“That‘s the balance we need to have sustainable labor market consistent with (reducing) inflation,” she added.
“We still have to get down to 2%…,” Daly went on. “I can’t guarantee we’ll get there this year, but the good news is we’re really making progress….We might not make it this year, but we’re making progress, and we remain resolute to get the job done.”
Daly said “monetary policy is in a good place, and the economy is in a good place; it’s where we need it to be to bring inflation down.”
But turning to the vagaries of trade, fiscal, regulatory and immigrat ion policies, Daly said, “It’s too soon to presume how any of this will work out.”
In conversations with business people, Daly said she has found that “businesses are still waiting to see, and as they wait to see we wait to see.”
“There’s plenty of time (for the Fed) to make decisions as the economy evolves.”
On a day when Powell vistied Trump in the Oval office, Daly supposed that the Fed chief told the president that the Fed “will do what is right to … achieve price stability and full employment.”
Earlier, the Fed put out a statement saying, “Chair Powell did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming economic information and what that means for the outlook. Finally, Chair Powell said that he and his colleagues on the FOMC will set monetary policy, as required by law, to support maximum employment and stable prices and will make those decisions based solely on careful, objective, and non-political analysis.”
Barkin also suggested the outlook is too hazy for clear-headed decision making. He likened the current confusion about trade and other policies to “driving through fog….it’s just really hard to drive when it’s really foggy and businesses are afraid to accelerate because they don’t know what’s around the next curve. And they’re also afraid to put on the gas because you don’t want someone crashing into you. So by and large they’re pulling over and putting on the hazards ….”
Logan, usually considered one of the more hawkish Fed presidents, made clear she is in no hurry whatsoever to change monetary policy.
Economic forecasts “are never certain,” she said. “And the wide array of ongoing changes in federal policies makes the current outlook even more difficult to pinpoint.”
Logan, speaking to the Greater Waco (Texas) Chamber of Commerce, said the economy could go in different directions, depending on how Trump policies play out, leaving the Fed with different monetary poliicy choices.
On one hand, “tariffs could push up inflation at least temporarily,” she said. “And if expectations of higher inflation became entrenched, inflationary pressures could persist and become very costly to reverse.”
“Stimulative federal fiscal policy or changes in regulations could also boost investment and consumer demand,” Logan added.
“On the other hand, economic uncertainty and financial market volatility could prompt consumers and businesses to pull back, slowing the economy,” she went on. “And tariffs could weigh on employment in sectors that rely heavily on imported materials.”
These different scenarios leave the FOMC in limbo, Logan suggested. “For now, with the labor market holding strong, inflation trending gradually back to target, and risks to the FOMC’s objectives roughly balanced, I believe monetary policy is in a good place.z’
“It could take quite some time to know whether the balance of risks is shifting in one direction or another,” she continued. “But if the balance shifts, we’ll be well prepared to respond.”
Goolsbee was asked what most “keeps him up at night,” and he pointed to the possibility that tariff policies could trigger a financial crisis.
Continued relatively low unemployment and inflation remain fairly low “gives me some comfort,” he said, but he is concerned “the more the tariffs jump out of their lane.” Although the U.S. economy is “overwhelmingly domestically driven,” with imports accounting for just 11% of GDP, he said “there are three clear ways (tariff policy) can jump out of its lane:”
– “one, if there is retaliation from other countries, which double the size of the tariff effect…
– two, if higher tariffs increase the cost of imported parts that are components of U.S. products, and
– three, “if people freak out about anything and change their behavior — consumer spending., business investment, uncertainty – that can have a far more out-sized impact.’
“It’s that freak-out channel that should keep us up at night,” he added.
Fed Governor Adriana Kugler expressed some concerns of her own Thursday, as she opened the
5th Annual Federal Reserve Board Macro-Finance Workshop. She listed three
pressing questions, starting with “the possible interaction between the financial vulnerabilities of firms and their exposure to trade.”
“As global economic tensions rise and supply chains evolve, understanding how a company’s financial health intersects with its international trade exposure becomes increasingly crucial,” she said.
Second, Kugler said she is “monitoring the financial stability implications of the potential lower desirability of U.S. financial assets in flight-to-safety events.”
Traditionally, U.S. dollar assets have been treated “a safe haven during times of global economic uncertainty,” she noted. Yet, “we recently saw instances in which the VIX went up, stock prices went down, long-term yields from U.S. Treasury securities went up, and the U.S. dollar depreciated against the currencies of advanced foreign economies (AFEs), with a notable role for the euro.”
Third, Kugler said she has been “keenly interested, for some time now, in how stresses in the commercial real estate (CRE) sector could potentially spill over to the rest of the U.S. economy.”