– Some Want To Resume Rate-Cutting; Others Oppose; Others Unsure
By Steven K. Beckner
(MaceNews) – With the Federal Reserve having taken a much-anticipated pause in interest rate reductions last Wednesday, financial market participants worldwide are anxious to know when the Fed might resume cutting rates and by how much, but officials are giving no clear, much less unified, guidance.
And with the embattled Fed about to come under new leadership, the future path of monetary policy is hazier than ever. As was the case in the run-up to the Jan. 27-28 Federal Open Market Committee meeting, Fed policy-makers are divided on what the Fed’s rate-setting body should do and when.
The FOMC, which last Wednesday left the key federal funds rate unchanged in a target range of 3.5% to 3.75% on yet another split vote, next meets March 17-18, but officials have given little indication they will be ready to return to easing that soon.
With its 25 basis point rate cut on Dec. 10, the FOMC had cut the funds rate 75 basis points in the final months of last year and 175 basis points since it started “normalizing” monetary policy in September 2024.
But the current median funds rate of 3.6% is still 60 basis points above the Committee’s 3.0% estimate of the “longer run” or “neutral” rate, and some officials think the Fed should get back to lowering the funds rate closer to bring it closer to some semblance of “neutral.” But others are reluctant to do so, while others are torn and uncertain about when easing should resume.
The only consensus is the next rate move is likely to be lower, not higher. Chair Jerome Powell said last Wednesday a rate hike is no one’s “base case.” In their December Summary of Economic Projections, the 19 FOMC participants anticipated a single 25 basis point rate cut in 2026, which would leave the funds rate at a median 3.4% — still 40 basis points above putative “neutral.”
Divisions have been on fully display since last Wednesday’s FOMC meeting.
Atlanta Federal Reserve Bank President Raphael Bostic said Monday urged “patience” Monday, saying he could see no justification for cutting rates at a time when inflation is still “too high.”
Richmond Fed President Tom Barkin took a more middle-of-the-road approach Tuesday, saying the FOMC will “respond as appropriate” as the economy evolves following 175 basis points of “insurance” rate cuts, but suggested the economic outlook is still too “foggy.”
Late Wednesday, Governor Lisa Cook, whom President Trump is trying to oust as part of his pressure campaign on the Fed, struck a more hawkish pose than she’s normally known for, declaring that she supported the decision to stay on hold because she sees “risks as tilted toward higher inflation” and said she will retain that view until she sees “stronger evidence that inflation is moving sustainably back down to target,” unless “unexpected” labor market weakness appears.
Other comments late last week show similar divergences.
When the FOMC left rates unchanged on a 10-2 vote last Wednesday, it left the door open to future rate cuts. Its policy statement reiterated, “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
But elsewhere in its statement, the FOMC tilted away from easing by removing
a previous assertion that “downside risks to employment rose in recent months,” saying more symmetrically that it is “attentive to the risks to both sides of its dual mandate.”
In another less easing-friendly revision, the FOMC statement went from calling economic growth “moderate” to calling it “solid. And it said, “job gains have remained low, and the unemployment rate has shown some signs of stabilization,” whereas in December the FOMC statement noted that unemployment had “edged up.”
In his post-FOMC press conference, Powell reinforced the message that rates will be kept where they are for an indefinite period by pointing to “solid” growth, good employment prospects and still “elevated” inflation.
Against that backdrop, Powell repeatedly told reporters that past rate reductions had left monetary policy “well-positioned” to wait and see how the economy performs before considering further rate cuts. He said the funds rate is already “within the range of plausible estimates” of “neutral”
Of course, not everyone on the FOMC sees it that way. In particular, some officials dispute Powell’s contention that the funds rate is near neutral.
Governors Stephen Miran and Christopher Waller dissented against leaving the funds rate unchanged, because both wanted a 25 basis point rate cut.
Last Friday, Waller explained his dissent by saying, “monetary policy is still restricting economic activity, and economic data make it clear to me further easing is needed,” although policy is “closer to neutral.”
Despite “solid” growth, “the labor market remains weak,” Waller said in a statement released by the Fed, adding that recent payroll and other data do “not remotely look like a healthy labor market.”
As for inflation, Waller acknowledged tariff effects on goods prices, but said “appropriate monetary policy is to ‘look through’ these effects as long as inflation expectations are anchored, which they are. Inflation excluding tariff effects is running close to the FOMC’s 2% target and on a path to sustainably reach that goal.”
“With total inflation excluding tariff effects close to our target at just slightly above 2% and a weak labor market, the policy rate should be closer to neutral, which the median FOMC participant estimates is 3%, and not where we are—50 to 75 basis points above 3%,” the Waller statement went on. “I favored reducing the policy rate to strengthen the labor market and guard against a deterioration that would be harder to address once it has begun.”
Fed Vice Chair Michelle Bowman, who dissented last July when the FOMC delayed rate cuts and has been a vocal easing proponent ever since, voted with the majority last Wednesday, but said Friday she would have been willing to vote for another rate cut for many of the same reasons Waller cited.
“(W)ith inflation close to 2%, after excluding one-off tariff effects, and with unemployment near estimates of its natural rate but at risk of deteriorating, I continue to see policy as moderately restrictive,” she told a bankers conference in Hawaii. “Downside risks to the labor market have not diminished, and we should not overemphasize the latest reading on the unemployment rate.”
Because “it will take time to get a clear signal about stability in the labor market,”Bowman argued “we should continue to focus on downside risks to our employment mandate…”
“(A)bsent a clear and sustained improvement in labor market conditions, we should be ready to adjust policy to bring it closer to neutral,” she went on.
The FOMC should even be careful about sending a “pause” signal, Bowman warned: “We should also not imply that we expect to maintain the current stance of policy for an extended period of time because it would signal that we are not attentive to the risk that labor market conditions could deteriorate.”
A different perspective came from St. Louis Fed President Alberto Musalem on Friday.
Maintaining that the current funds rate target is “neutral in inflation-adjusted, or ‘real,’ terms,“ he told an audience at the University of Arkansas“… it would be unadvisable to lower the rate into accommodative territory at this time.”
Musalem was not as “hawkish” as some Fed officials, allowing for a potential resumption of easing under certain conditions. He said he “could support a lower policy rate if further signs of labor market weakness emerge, provided there are no signs of increased persistence in above-target inflation and inflation expectations remain anchored.” He added that he “could also support lowering the nominal policy rate if expected inflation declines sustainably to 2% or below ….”
But for now, he echoed Powell in calling monetary policy “well positioned to respond as needed ….”
“(G)given the current data and the balance of risks, I believe it would be unadvisable to lower the rate into accommodative territory at this time,” Musalem said. “Aside from risking higher or more persistent inflation, easing could be counterproductive for the labor market by raising inflation expectations and long-term interest rates, thus slowing the economy and hurting employment.”
This week, the cacophony continued with officials taking disparate positions on the appropriate policy course.
Bostic sounded even less open to additional easing in a valedictory appearance before the Atlanta Rotary Club on Monday, saying he is not projecting “any” rate cuts this year.
“I think we have so much momentum in the economy that we need to keep policy in a mildly restrictive stance…,” he said. “It’s hard to make a case that our policy is heavily or strongly restrictive.”
Bostic, who will be leaving the Atlanta Fed captaincy at the end of this month, forecast that by mid-year the economy will be “in equilibrium” with strong growth, unemployment in a “low” 4.2-4.4% range and inflation still “too high.”
“Maybe one or two cuts would put us at neutral,” he said, but said that would mean it “will be hard to get inflation down to 2%.”
So Bostic argued, “it’s time to be patient…Be prudent. We have time to wait. Markets have stabilized; that gives us time to let things play out.”
Barkin was more equivocal about the likely direction of monetary policy, but he too seemed to imply a need to take a cautious, patient approach by suggesting the Fed still needs greater clarity on where the central bank stands relative to the balance of risks. The economy is “coming out of the fog,” he said but “we have some distance to travel before we get home.”
He referred to the 175 basis points of rate cuts over the last year and a half as taking policy “toward neutral” and as “having taken out some insurance to support the labor market as we work to complete the last mile to bring inflation back to target.”
As for what comes next, he was vague. “So far, so good,” he told a business group in Columbia, S.C. “But we know things change, and as they do, we remain ready to respond as appropriate.”
Barkin, who will return to the voting ranks next year, echoed Powell and others in calling the economy “remarkably resilient,” but expressed concerns on both sides of the Fed’s dual mandate.
He was hopeful on inflation, pointing to “customer push back” against price increases and productivity gains that should help businesses absorb higher input costs, but he made clear he remains uneasy, noting that inflation has been running above target since 2021.
“It would be easy to blame the one-time effect of tariffs or measurement lags in shelter costs, but I take this sustained miss seriously,” Barkin said. “That’s because I believe today’s inflation numbers, regardless of the ‘why,’ significantly influence tomorrow’s inflation.”
While faster productivity gains could help contain inflation, he warned that “In boardrooms around the country, sales and finance teams are debating how aggressively to increase prices,”
Barkin also had worries about the labor market, though. “Low hiring hasn’t been translating into rising unemployment because the growth in labor supply has shrunk at about the same pace as labor demand. But slow job growth is not a comfortable place to be.”
Cook voted for past rate cuts, but was fairly strident in opposing further easing Wednesday evening.
“At this time, I see risks as tilted toward higher inflation,” she told the Economic Club of Miami. “As a result, I supported the FOMC’s decision to hold the policy rate steady at our meeting last week.”
Cook, whom Trump has been trying to oust on the grounds of alleged mortgage fraud and whose fate awaits a Supreme Court ruling, conceded “there is an argument for being optimistic about the path of inflation,” but added, “until I see stronger evidence that inflation is moving sustainably back down to target, that is where my focus will be, in the absence of unexpected changes in the labor market.”
“As I have said before but cannot repeat too many times, the FOMC’s firm commitment to its inflation mandate is imperative,” she continued. “After nearly five years of above-target inflation, it is essential that we maintain our credibility by returning to a disinflationary path and achieving our target in the relatively near future.”
“At the height of the recent bout of high inflation, we promised that we would return to target, and it was this promise that kept inflation expectations anchored and allowed us to see the sharp disinflation from 2022 through 2024,” she went on. “If we were to lose credibility, the cost may not be immediately felt, but it would be resoundingly and painfully felt when we need it the most, in an inflation crisis such as the one we experienced three years ago.”
Like others, Cook described the economy as “resilient,” but said “inflation appears to have stalled stubbornly above our 2% goal, while at the same time the labor market appears to have stabilized in recent months.”
Estimating that core PCE inflation was running at 3% in December, she repeated that “progress on inflation essentially stalled in 2025.”
Cook acknowledged that “the recent disinflationary trend could resume once tariffs effects recede into the rear view mirror,” but she said, “the future direction of tariff policy is unclear. And, even when tariff levels are settled, uncertainty remains with respect to how long it will take for that price rise to be complete and whether it will take hold in inflation expectations.”
She downplayed labor market risks. “(D)ata available through the end of last year suggest that the labor market stabilized after having softened through 2024 and earlier in 2025.”
“In December, the unemployment rate was 4.4%,” Cook noted. “While up from the cyclical trough, the rate was little changed over the second half of last year and remains relatively low.
She said “risks to the labor market persist,” but said “the labor market is roughly in balance.”
Two days after the FOMC met, Trump announced he will nominate former Kevin Warsh to succeed Powell in mid-May. The former Fed Governor, who should win Senate confirmation once the objections of retiring Sen. Thom Tillis, R-NC, are, presumably, swept aside, has been vocal in criticizing the way the Fed does business and called for “regime change,” particularly on balance sheet policy and banking regulation.
But Warsh has never been one to risk higher inflation with easy money, so it seems unlikely he will lead a divided FOMC to significantly lower interest rates, even if he wanted to. Trump may well be disappointed.