By Steven K. Beckner
(MaceNews) – As the new year commenced, Federal Reserve officials have neither foreclosed the possibility of further interest rate reductions, nor encouraged hopes for them.
With the economy just beginning to come out of a fog of uncertainty induced by the data blackout accompanying last Fall’s government shutdown, few are prepared to prejudge exactly what might be required of monetary policy or when.
Richmond Federal Reserve Bank President Thomas Barkin suggested Tuesday he’s in no hurry to change rates again soon, saying the federal funds rate is already “within the range of its estimates of neutral.” A similar point was made Monday by Minneapolis Fed President Neel Kashkari.
By sharp contrast, Fed Governor Stephen Miran asserted Tuesday that monetary policy is “clearly restrictive and holding the economy back.” He advocated at least 100 basis points of further reductions in the Fed’s policy rate.
Somewhat further down the scale of dovishness, Governor Michelle Bowman has also been a vocal supporter of rate cutting in the recent past, but her first speech of 2026 later Wednesday is advertised as being confined to her bailiwick as Vice Chairman for Supervision.
Philadelphia Fed President Anna Paulson, who will be voting on Fed’s rate-setting Federal Open Market Committee this year, sounded conditionally more open to additional monetary easing than others over the weekend, saying “some modest further adjustments to the funds rate would likely be appropriate later in the year” — provided that her baseline forecast of “moderating” inflation, “stabilizing” employment and moderate economic growth is realized.
The FOMC cut the federal funds rate by 25 basis points for a third straight meeting on Dec. 10, bringing the policy rate down to a target range of 3.5% to 3.75% (a median 3.6%).
Including the 100 basis points of cuts in the fourth quarter of 2024, the FOMC has cut the funds rate by a total 175 basis points.
By the internal logic of FOMC participants, there would seem to be room for more easing. The funds rate remains 60 basis points above the FOMC’s own 3.0% median estimate of the “longer run,” “neutral” rate. (Officials’ estimates range from 2.8% to 3.6%).
But much as President Trump would like speedy further cuts, divisions among FOMC members cloud the outlook for future rate moves.
In their December Summary of Economic Projections, the 19 FOMC participants anticipated just a single 25 basis point rate cut in 2026, which would leave the funds rate at a median 3.4%, with some projecting more easing, some less.
The timing of further rate cuts is very much in doubt, however.
Chair Jerome Powell conveyed no sense of urgency in his Dec. 10 press conference, as he repeatedly told reporters the Fed was now “well-positioned” to “wait and see” how the economy evolves before considering additional rate cuts. And he said the Fed is now within the upper range of estimates of funds rate neutrality.
Seldom has there been less consensus, or at least unanimity, on the FOMC. There were three dissents on Dec. 10. Miran again voted against the 25 basis point rate cut because he wanted a 50 basis points cut. Chicago Federal Reserve Bank President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid dissented because they preferred to leave rates unchanged.
Minutes of the December meeting seemed to confirm the lack of urgency among the FOMC majority. They revealed “most participants judged that further downward adjustments to the target range for the federal funds rate would likely be appropriate if inflation declined over time as expected.”
But “some participants suggested that, under their economic outlooks, it would likely be appropriate to keep the target range unchanged for some time after a lowering of the range at this meeting.”
And, the minutes added, “a few participants observed that such an approach would allow policymakers to assess the lagged effects on the labor market and economic activity of the Committee’s recent moves toward a more neutral policy stance while also giving policymakers time to acquire more confidence about inflation returning to 2%.”
Powell is expected to be replaced before long, possibly by Trump’s National Economic Council Director Kevin Hassett, but his term as chair runs through May, and he has given no indication he is willing to step down before then.
In the meantime, Fed officials continue to give conflicting indications although a common theme for now has been caution.
A major exception is Miran, whom Trump appointed to fill a vacancy on the Federal Reserve Board last August, taking leave from his job as chairman of the President‘s Council of Economic Advisors.
“I think it’s very difficult to argue that policy is about neutral. I think policy is clearly restrictive and holding the economy back,” Miran told the Fox Business Network Tuesday. “I think that well over 100 basis points of cuts are going to be justified this year.”
Bowman presumably shares that view to an extent, although it remains to be seen whether she addresses the interest rate issue in a scheduled late Wednesday speech to the California Bankers Association.
Other officials are taking a guarded approach so far this year.
Barkin, noting the FOMC slashed rates late last year “as the labor market has softened,” said Tuesday the funds rate is “now within the range of its estimates of neutral.”
He described the rate reductions made so far as “taking out a bit of insurance” in remarks to the Raleigh Chamber of Commerce.
Barkin was deliberately vague about where and when rates go from here. “(G)oing forward, policy will require finely tuned judgments balancing progress on each side of our mandate.”
Echoing many of his colleagues, he said such judgments have been complicated, for the time being, by the dearth of data. “Unfortunately, for the last three months, we’ve been operating without data or with low-quality data that are hard to put much weight upon. That makes our task a bit more challenging. So, I’m looking forward to digging in and learning as clean data start to come in over the coming weeks.”
Barkin prefaced his comments on policy with generally upbeat thoughts about the economy, saying it “has proven remarkably resilient.” He pointed to 4.3% thrid quarter GDP growth, “historically low”4.6% unemployment and the fact that “core PCE inflation has come back down from its peak and is now at 2.8%.
“This resilience has been enabled by strong underlying dynamics,” he observed. “Consumers have jobs. Real wages are increasing. Asset values keep growing. Corporate earnings and earnings outlooks remain strong.”
Barkin observed that “tariffs pushed up input costs,” but said “their impact on prices has been muted” because firms have had trouble passing on higher costs. And while that has put pressure on profit margins, “businesses leveraged automation, lower turnover and reduced hiring to drive productivity that served as an offset.”
Ordinarily, increased productivity tends to reduce job growth, but he said “lower immigration and baby boomer retirements shrank the growth of labor supply at the same time. As a result, the unemployment rate hasn’t moved as much as some may have expected.”
Barkin acknowledged the plunge in consumer sentiment, but said “ 2025’s uncertainty is bound to diminish; the fog should lift. And as firms build confidence in demand and the policy environment, that should be good for hiring and investment.”
What’s more, he said, “High asset values have eased financial conditions. Fiscal stimulus from the recent tax bill is coming, most notably in coming tax refunds. Gasoline prices are down. Deregulatory initiatives are rolling out. And the impact of the rate cuts we’ve made in the last 16 months — 175 basis points — should flow into the economy as well.”
“Odds are we’ll do pretty well,” Barkin said in response to questions.
But he issued a couple of caveats. Asked about the biggest risk facing the economy, he said he is “watching layoffs” as a key indicator. And given that consumer spending accounts for 70% of GDP, he warned that if consumer sentiment keeps falling and people decide they need to save more, “that could mean a significant pullback in the economy. That’s something to watch for.”
Asked why mortgage and other long-term interest rates have not fallen as the Fed has lowered the short-term rates it controls, Barkin blamed supply and demand conditions in the Treasury securities market.
“We’ve taken short-term interest rates down 175 basis points, and 10-year and 30-year yields have barely moved,” he said, adding that federal borrowing to finance record federal budget deficits have driven up demand for Treasury securities.
Barkin said the best thing the Fed can do to put downward pressure on long-term rates is to “do what we do well — control inflation and inflation expectations.
Having only succeeded Patrick gather as oil Fed President last July, Paulson’s reputation has yet to fully form, but so far the former Chicago Fed director of research seems to be an open-minded, middle of the road type.
Paulson, a 2026 FOMC voter, identified two key themes for 2026 in Jan. 3 remarks: “cautious optimism on inflation and wanting greater clarity on what is pushing growth up and employment down and whether these trends will continue.”
“Although I see labor market risks as somewhat elevated, my baseline outlook is pretty benign and does not take strong signal from (third quarter) growth or the recent uptick in the unemployment rate,” she told the Allied Social Science Associations annual meeting. “I see inflation moderating, the labor market stabilizing and growth coming in around 2% this year.”
“If all of that happens, then some modest further adjustments to the funds rate would likely be appropriate later in the year,” Paulson added.
Kashkari, who has stood on both sides of the hawk-dove divide during his career as head of the Minneapolis Fed, enunicated a case for standing pat, at least for awhile, in a Monday interview on CNBC.
“My guess is we’re pretty close to neutral right now,” Kashkari said. “We just need to get more data to see which is the bigger force. Is it inflation or is it the labor market? And then we can move from a neutral stance, whatever direction is necessary.”
“I think inflation is still too high. And the big question in my mind is, how tight is monetary policy?” Kashkari said. “Over the last couple of years, we kept thinking the economy is going to slow down, and the economy has proven to be far more resilient than I had expected. That tells me, well, monetary policy must not be putting that much downward pressure on the economy.”