By Steven K. Beckner
(MaceNews) – The outlook for U.S. monetary policy remained murky Thursday, following the latest barrage of comments from Federal Reserve officials….
Divisions among Fed policymakers have continued to emerge in wake of last Wednesday’s interest rate cut, leaving in doubt whether they will be able to agree on another reduction when they meet again Dec. 9-10.
While a few officials have been outspoken in favor of further easing, others have been ambivalent, if not hostile, to cutting rates again as soon as next month.
In sum, the overall tone of official comments Thursday and earlier this week have served to reinforce Fed Chair Jerome Powell’s statement that a December rate cut is “not a foregone conclusion.”
New York Federal Reserve Bank President John Williams, one of Powell’s top lieutenants as vice chair of the Fed’s policymaking Federal Open Market Committee, had been a supporter of easing in recent weeks to address labor market weakness, but Thursday he confined himself to saying the Fed must adhere to its 2% inflation target and pursue “price stability.”
Chicago Fed President Austan Goolsbee, who voted for rate cuts in September and October, also exhibited a clear lack of urgency about cutting rates further Thursday, particularly in the absence of economic data from a shuttered federal government. He saw “stability” in the labor market and expressed greater uneasiness about inflation in a statistical void.
Meanwhile, Cleveland Fed President Beth Hammack, who will join the FOMC voting ranks next year, was even more blunt in opposition to another near-term rate cut, contending that inflation is a bigger worry than labor market softening and asserting that policy should stay “at a mildly restrictive setting to strike the right balance between our goals.”
For a second straight meeting, the FOMC cut the funds rate by 25 basis points on Oct. 29 to a target range of 3.75% to 4.0%. But in an unusually rendered split decision, Fed Gov. Stephen Miran dissented in favor of a 50 basis point cut while Kansas City Fed President Jeffrey Schmid dissented in the opposite direction, preferring to leave rates unchanged.
Augmenting that monetary easing step, the FOMC acted sooner than many had expected to halt “quantitative tightening” at the end of this month.
“Effective December 1, the Fed will keep the size of its balance sheet unchanged and reinvest all maturing agency securities into Treasury bills, thereby gradually increasing the share of Treasury securities in its portfolio and shortening its maturity,” the FOMC statement reads.
The FOMC did not return to a “quantitative easing’ strategy of expanding its balance sheet, but by discontinuing the run-off of securities that was shrinking the Fed’s securities portfolio, the FOMC’s action is expected to make financial conditions more accommodative and money markets more liquid than they otherwise would have been, had it continued the shrinkage.
Ending QT also brings the rate and quantity sides of policy into better alignment for the first time in more than a year. Previously (and questionably in the minds of some), the Fed had been easing with rates, while tightening with its balance sheet strategy.
The FOMC had previously lowered the policy rate by the same amount on Sept. 17 to a target range of 4.0% to 4.25%.
In its revised Summary of Economic Projections, published in September, FOMC participants projected another 25 basis points of monetary easing will be done at the Committee’s final meeting of 2025.
Although a 25 basis point remains in the SEP “dot plot,” Powell made a point of saying in his Oct. 29 press conference that a December 9-10 rate cut is “not a foregone conclusion, in fact, far from it.” He cited “strongly differing views about how to proceed in December.”
He went on to observe that the FOMC has now cut the funds rate 150 basis points since it began easing in September 2024, so that monetary policy is now “150 basis points closer to neutral.” He said that makes some officials want to “pause” and to “wait” before easing further, while others want to “go ahead” with more easing.
Powell said the FOMC “will at some point” resume easing but said the FOMC is trying to cope with a “challenging” and “difficult” situation where it must “balance” two-sided risks – to the upside for inflation, to the downside for jobs. In that climate, he said it’s appropriate to be “careful.” If there’s a “high degree of uncertainty” on Dec. 10, that “could be an argument in favor of caution about moving,” he added.
Since then, the comments of many Fed officials have mirrored Powell’s caution and hesitancy,
Most recently, on Thursday, Goolsbee focused on the dearth of data to argue for a cautious approach. “I lean more to the, when it’s foggy, let’s just be a little careful and slow down,” he told CNBC.
Although Fed officials at large have clearly become more concerned about the labor market, they seem not to be alarmed. Powell, for instance, said last week that layoffs need to be monitored, but repeatedly said there has been nothing more than a “gradual cooling” of the labor market thus far.
The Fed is at something of a disadvantage with the federal government shutdown causing a lapse in the usual flow of job and other statistics. But the latest private data have been mildly encouraging. Private employers added 42,000 jobs in October — first monthly gain since July, according to payroll processor ADP. The Institute for Supply Management reported October improvment in the employment components of both its manufacturing and non-manufacturing indices, though they still showed contraction.
On a less rosy note, outplacement firm Challenger, Gray & Christmas says layoffs hit their highest level in more than 20 years last month.
Goolsbee said most labor market soundings show “a lot of stability in the job market,” and he said “if it starts to deteriorate on the job market side we’re going to see that pretty much right away.”
On the other hand, “if inflation starts to go wrong, we’re not really going to get observations that show that,” he said, adding, “That accentuates my caution of front-loading rate cuts and just assuming that the inflation that we’ve seen the last three months is going to go away.”
Hammack likewise focused more on upside risks to inflation than on downside risks to employment, as she spoke about the “balancing act” the FOMC must perform in Thursday remarks to the Economic Club of New York.
“On one side, inflation is too high and trending in the wrong direction,” she said. “On the other, labor market conditions have softened but remain generally healthy.”
“As I navigate the economic high wire, I see an important role for the balancing pole to help counter the misses to the inflation side of our mandate,” Hammack continued. “This means monetary policy should be mildly restrictive to return to our 2% inflation objective in a timely fashion while limiting the misses from maximum employment.”
Calling the 3.75% to 4.0% funds rate target “only barely restrictive,” she said, “At this point, I don’t think there is more that monetary policy can do without risking a fall off the wire.”
Hammack said she “remain(s) concerned about high inflation and believe policy should be leaning against it. After last week’s meeting, I see monetary policy as barely restrictive, if at all, and it’s not obvious to me that monetary policy should do more at this time.”
Contrary to some officials who have contended that tariff hikes should not cause persistent inflation, she declared, “I don’t see elevated inflation as a purely transitory phenomenon that I should look through.”
“Without appropriately restrictive policy, this long stretch of elevated inflation could eventually cause high inflation to become embedded into the economy,” Hammack said.
Meanwhile, she said much of the available data on jobs “have been consistent with stable, healthy labor market conditions.”
Williams primarily stayed in a theoretical realm at the Goethe Institute in Frankfurt, Germany, but said the Fed and other central banks should be “consistently aiming for price stability” and said the Fed’s 2% inflation target “has served us well.”
Earlier this week, most Fed officials sounded non-committal regarding the December FOMC meeting.
Not surprisingly, Miran continued to advocate additional easing on Monday: “The Fed is too restrictive, neutral is quite a ways below where current policy is,” he said Monday. “Given my rather more sanguine outlook on inflation than some of the other members of the committee, I don’t see a reason for keeping policy as restrictive.”
Miran doubled down on his aggressive easing posture Wednesday, defending his call for larger rate cuts and telling Yahoo Finance, “I want to get there faster than everybody else. It’s not that the destination is really all that different.” He was apparently referring to the FOMC’s median funds rate projection of 3.1% by the end of 2027, which is identical to the Committee’s estimate of the “longer run” or “neutral” rate.
Fed Vice Chairman for Supervision Michelle Bowman has been less zealous than Miran, but she too weighed in for further easing, saying Tuesday that she is more concerned with the labor market than inflation.
But a different mood came from others.
St. Louis Fed President Alberto Musalem gave no indication he’s in the mood to support a December rate cut Thursday evening.
Musalem voted for the Oct. 29 rate cut, but he seemed to suggest that another rate cut before the end of the year is not warranted.
While pointing to the economy’s resilience and still low unemployment, he put more emphasis on risks of higher inflation in remarks to the Fixed Income Analysts Society.
On Monday, Fed Gov. Lisa Cook, who President Trump attempted to fire for alleged mortgage fraud but who nevertheless voted for the Oct. 29 rate cut, defended that action, but avoided taking a position on the December rate decision. She said she voted for last week’s rate cut because “the downside risks to employment are greater than the upside risks to inflation.”
Cook called the rate reduction “another gradual step toward normalization” that left policy “modestly restrictive,” which she said is “appropriate given that inflation remains somewhat above our 2% target.”
But she gave no indication of her leanings ahead of the December meeting, saying only that “policy is not on a predetermined path. We are at a moment when risks to both sides of the dual mandate are elevated. Keeping rates too high increases the likelihood that the labor market will deteriorate sharply. Lowering rates too much would increase the likelihood that inflation expectations will become unanchored. As always, I determine my monetary policy stance each meeting based on the incoming data from a wide variety of sources, the evolution of my outlook, and the balance of risks.”
She added that the December meeting will be “a live meeting.”
Also Monday, San Francisco Fed President Mary Daly said, “it was appropriate to take another bit off the policy rate,” but left open what the FOMC should do next month.
“We need to continue to put downward pressure on inflation and keep our policy modestly restrictive, but not hold the reins so tight that we injure the labor market unnecessarily and give people lower inflation but fewer jobs,” the non-voter said.