– A Few Favor More Easing, But Most Focus On Curbing Inflation, Not Boosting Jobs
By Steven K. Beckner
(MaceNews) – With relatively rapid economic expansion underpinning the labor market and with inflation remaining stubbornly high, most Federal Reserve officials sound increasingly disinclined to resume interest rate reductions after the Fed’s rate-setting Federal Open Market Committee indefinitely halted them late last month.
While there are outspoken proponents of additional monetary easing, most Fed officials feel constrained about doing more with monetary policy to bolster employment because of persistently high inflation and uncertainty about the outlook.
Governors Christopher Waller and Stephen Miran, both of whom dissented on Jan. 28 against leaving interest rates unchanged, have since argued in favor of additional rate cuts, although they confined their comments this week to non-monetary subjects.
Miran did downplay the inflationary influence of the Trump administration’s tariff policies and the weakening dollar on Monday.
Fed Vice Chairman for Supervision Michelle Bowman, who voted with the majority to stay on hold, has said she too could have voted for another 25 basis point cut in the key federal funds rate. She didn’t elaborate in a Wednesday appearance.
Outside of those three policymakers, a return to rate cutting appears to be very much a minority position on the near horizon. Most officials believe the Fed has done enough for the time being and are withholding support for further easing, barring either greater progress in reducing inflation or unexpected labor market weakness.
Kansas City Federal Reserve Bank President Jeffrey Schmid contended Wednesday there is no need for further rate cuts with the economy doing so well, particularly since inflation remains too high. Further rate cuts would risk “allowing high inflation to persist even longer,” he warned.
A similar stance was taken Tuesday by two voting Federal Reserve Bank Presidents. Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan both emphatically reaffirmed their stand-pat stance.
Not only is “monetary policy …. in a good place to stay on hold,” said Hammack, but the current, nearly “neutral” funds rate could stay where it is “for quite some time” if the economy unfolds as she expects.
Logan, likewise, called the current funds rate “appropriate” and within the range of “neutral,” and said it may well be no further rate cuts will be needed if the labor market remains “stable.”
Soon-to-retire Atlanta Fed President Raphael Bostic was also pushing his belief that there is no justification for “any” 2026 rate cutting.
After cutting the funds rate by 75 basis points from September through December, the FOMC left that policy rate in a target range of 3.5% to 3.75% on on Jan. 28. Since it began “normalizing” rates in September 2024, the FOMC has cut rates by 175 basis points.
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, leading Waller, Miran and Bowman to argue that the funds rate is still overly restrictive. But most officials are reluctant to take the funds rate closer to “neutral” until they become more certain that inflation is on a downward trajectory.
While Waller and Miran, and to a lesser extent, Bowman are adamant about wanting to cut rates further, others feel just as strongly that rates are fine where they are for the foreseeable future.
Schmid, who is not voting on the FOMC this year, was the latest to propound the case for staying on hold.
After observing that the economy has “considerable momentum,” he said Wednesday that the Fed’s concentration needs to be on bringing down inflation, not boosting employment.
“Overall, with inflation still running hot, it appears that demand is outpacing supply across much of the economy,” Schmid said. “I remain open to the possibility, and I’m even optimistic, that A.I. and other innovations will eventually lead to a non-inflationary, supply-driven growth cycle.”
“However, based on the current rate of inflation, we are not there yet,” he continued, adding that “with demand outpacing supply and inflation running closer to 3% than 2%, I see it as appropriate to maintain a somewhat restrictive policy stance.”
Lower rates are simply unnecessary in Schmid’s view. “With the cumulative rate cuts carried out since 2024, the federal funds rate is now well off its post-pandemic high and arguably no longer restraining activity all that much, if at all…. . With growth showing momentum and inflation still hot, I’m not seeing many indications of economic restraint.”
Schmid warned that “further rate cuts risk allowing high inflation to persist even longer.”
“We must remain focused on our headline inflation objective, otherwise I believe there is a real risk that inflation will get stuck closer to 3% than 2% in the long run,” he added.
Schmid said the FOMC needs to ascertain whether growth is “supply-driven” or “demand-driven,” because the latter because the latter “can increase output but often at the cost of higher inflation.”
“With inflation running above the Fed’s target for nearly five years now, the distinction matters when thinking about the correct course for monetary policy,” he went on. ““In setting monetary policy, one of the most important questions we face is whether growth is being led by a jump in the capacity of the economy to supply goods and services or by a burst of demand for those same goods and services.”
Hammack and Logan were in agreement Tuesday that inflation is too high to take out more “insurance” against unemployment at a time of above-trend economic growth and labor market “stabilization.” That could change, but until it does, Hammack and Logan are opposed to making policy any easier.
After calling economic growth “encouraging” and saying “the labor market appears to have stabilized,” Hammack said, “At this point, I believe monetary policy is in a good place to stay on hold as we assess the incoming data and weigh if, and how, policy may need to adjust further.”
Elaborating, she said, “I believe we are in a good position to keep the funds rate at this level and see how things play out.”
“If we see progress on both sides of our mandate, that tells me that our policy rate is already at the right setting and that we should hold it there,” Hammack continued in remarks to the Ohio Bankers League. “Rather than trying to fine tune the funds rate, I’d prefer to err on the side of patience as we assess the impact of recent rate reductions and monitor how the economy performs.”
“Based on my forecast, we could be on hold for quite some time,” she added. “To me, a steady funds rate would reflect positive economic developments, though holding rates near neutral might slow the return of inflation all the way to 2%.”
In Hammack’s view, both sides of the Fed’s dual mandate scream for staying on hold. On the “maximum employment” side, “recent signs point to stabilizing conditions,” she said. “Overall, the labor market appears to be roughly balanced.”
What’s more, Hammack said, “Brighter growth prospects should translate into stronger demand in the labor market, helping to reduce the unemployment rate over the course of this year.”
On the “price stability” side, Hammack observed that inflation remains near 3% and “has largely moved sideways for more than two years …. .The longer that inflation remains at these levels, the greater the risk that it becomes entrenched in the economy.”
She said she “wants to see evidence that inflation is, indeed, coming down,” but she warned, “There’s a risk that inflation could persist near 3 percent through this year, as it has for the past two years.“
Hammack stipulated that if her forecast “doesn’t materialize, then policy would need to respond accordingly,” but she said, “Right now, I see the risks of a higher or lower path for the funds rate as about balanced.”
Logan was equally unwilling to justify more rate cuts – unless the economic forecast dims and/or inflation decelerates faster.
“Last year’s rate cuts put in place some additional insurance against a more rapid cooling in the labor market,” she told an Asset Management Derivatives Forum in Austin, Texas. . “But, with inflation still elevated, those cuts took on additional risk on the inflation side of our mandate.”
What’s more, “the labor market now appears to be stabilizing, and the downside risks appear to have meaningfully dissipated,” she said, adding that strong economic growth “should support the labor market.”
The Dallas Fed’s “trimmed mean” measure of inflation shows prices rising at a 2.5% year-over-year pace in November, but Logan said she is “not yet fully confident inflation is heading all the way back to 2%.”
Miran and others contend that the funds rate is still too “restrictive” relative to the hypothetical “neutral” level, but Hammack and Logan are not buying it.
“By many estimates, including my own, the funds rate is now in the vicinity of neutral, meaning it’s not meaningfully restraining the economy,” said Hammack.
Logan went further: “Model-based estimates for the real, or inflation-adjusted, neutral rate have been moving up since the pandemic due in part to recent gains in the potential growth of the economy from increases in productivity. Estimates currently range between 1.08 and 2.09 percent.”
“So, the current real fed funds rate – that is, the effective federal funds rate of 3.64% minus the 2% inflation target – now sits squarely within the range of neutral rate estimates,” she said, adding “our current stance of policy may be very close to neutral and providing little restraint on economic activity and inflation.“
Logan went on to say she is “cautiously optimistic that our current policy stance will allow the FOMC to bring inflation all the way back to our 2% target while sustaining a balanced labor market,” but she said the economic outlook and policy strategy must be approached “with humility.”
“We will learn in coming months whether inflation is coming down to our target and whether the labor market will remain stable,” Logan said. “If so, this would tell me that our current policy stance is appropriate and no further rate cuts are needed to achieve our dual mandate goals.”
Like Hammack, she allowed for the possibility that more rate cuts could eventually be needed. “If instead we see inflation coming down but with further material cooling in the labor market, cutting rates again could become appropriate.”
“But right now, I am more worried about inflation remaining stubbornly high, Logan said, adding, “Fortunately, our policy is well-positioned to respond to risks to either of the FOMC’s dual mandate objectives.”
Nor will Fed Vice Chairman Philip Jefferson be advocating for a resumption of easing anytime soon, based on comments he made last Friday, He sounded much like Powell in his post-FOMC press conference.
Noting that the FOMC has cut the funds rate 175 basis points since September 2024, he said, “Collectively, these adjustments put our policy rate broadly in the range of estimates of the neutral rate while maintaining a balanced approach to promoting our dual-mandate objectives.”
“Our policy stance should help stabilize the labor market while allowing inflation to resume its decline toward our 2% target,” Jefferson continued in a speech at the Brookings Institution.
He added, “The current policy stance is well positioned to address the risks to both sides of our dual mandate.” The FOMC will take a “meeting-by-meeting” approach, he vowed.
Like other officials who believe the FOMC should go slow and think twice about taking interest rates lower, Jefferson put more emphasis on upside risks to inflation than on downside risks to employment.
He said “progress on disinflation has stalled over the past year, and inflation remains elevated relative to our 2% target.”
Jefferson said he “expect(s) the disinflationary process to resume this year once increased tariffs pass through more fully to prices,” but that remains to be seen.
Meanwhile, on the other side of the Fed’s dual mandate, he said “the downside risks to employment remain, but my baseline is for the unemployment rate to hold approximately steady throughout this year.”
Although “the pace of job creation has eased,” Jefferson said, “other measures of labor market conditions point to stabilization …. . I see the overall labor market as roughly in balance, with a low-hiring, low-firing environment prevailing.”
Jefferson’s implication was that he would only back more easing if the inflation picture improves and or the employment outlook deteriorates more than expected.
San Francisco Fed President Mary Daly was also noncommittal Friday, but made clear she is wary of potential economic and labor market weakness.
The latest Fed official comments came amid a flurry of economic data that kept the outlook in doubt…failed to dispel the considerable uncertainty about the outlook.
Even though the Atlanta Fed estimates that the economy grew roughly 4% in the fourth quarter and even though Powell & Co. have been citing “solid” growth momentum going into the first quarter, consumer spending has proved unexpectedly weak. the Commerce Department reported retail sales were flat in December.
Yet employment was surprisingly strong in January, according to the Labor Department, which reported a 130,000 gain in non-farm payrolls,. following downward revisions to 2025 jobs. The unemployment rate dipped a tenth to 4.3%.
Markets had been poised to price in increased odds of rate cuts due to lower than expected job gains, but the unexpected upsurge in payrolls put a damper on that speculation.
In a pair of appearances Monday, Miran and Waller largely steered clear of the economy and monetary policy.
Miran did downplay inflation concerns in an appearance at Boston University, when he said that the impact of tariffs on domestic prices have been “muted.” He also minimized the inflationary influence of dollar depreciation and its monetary policy significance.
Waller concentrated on digital assets at a conference hosted by the Global Interdependence Center. saying that “some of the euphoria that came into the crypto world…(is) kind of fading.” He also said the Fed may allow non-banking institutions involved in crypto currencies to open “skinny accounts” at the central bank, which would give them less privileges than banks have with their “master accounts.”