By Steven K. Beckner
(MaceNews) – Federal Reserve officials have continued this week to muse about cutting interest rates for the first time since December when the Fed’s rate-setting Federal Open Market Committee meets in mid- September, but the FOMC remains divided and unsure.
Despite an uptick in inflation, labor market worries have come to the fore lately, and recent comments suggest some momentum toward a modest rate cut next month – nothing nearly as aggressive as demanded by President Trump.
However, apart from the split between “hawks” and “doves,” some officials are on the fence with the next FOMC meeting a month away and abundant economic data due between now and then.
On Wednesday, Chicago Federal Reserve Bank President Austan Goolsbee, who is voting on the FOMC this year, said that if the economy can stay on a “golden path” of full employment, “solid” growth and moderating inflation, the Fed could lower rates to their longer run level at some point, but he said tariffs present the Fed with both inflationary and recessionary risks that it must assess and respond to as needed.
Later, Atlanta Fed President Raphael Bostic said the Fed’s “price stability” mandate has been more at risk than its “maximum employment” mandate, but said the surprisingly weak July employment report raises questions for him and his Fed colleagues to ask over the next five weeks about “whether we need to be less patient”
Such comments, building on similar ones from last week, would seem to swell the tide of sentiment for a near-term resumption of monetary easing among Fed policymakers.
There are countervailing points of view, however. On Tuesday, two Fed officials were still leaning toward further delay.
Kansas City Federal Reserve Bank President Jeffrey Schmid, another FOMC voter, said Tuesday that because “growth remains solid” and “inflation remains too high, … policy should remain modestly restrictive.”
Meanwhile, Richmond Fed President Thomas Barkin said the economic road ahead is still too “foggy” for the FOMC to make a hard decision on when to adjust monetary policy.
This week’s comments come in the wake of a Labor Department report showing a modest July upswing in prices at the retail level. Its Consumer Price Index rose 0.2% last month, a tenth less than in June, leaving the overall CPI up 2.7% from a year earlier. But the core CPI was up a worse than expected 3.1%, two tenths higher than in June. Of greater concern, seemingly, was last Friday’s alarmingly weak July employment report.
Two weeks ago, the FOMC left the funds rate in a target range of 4.25% to 4.5% for a fifth straight meeting after lowering its policy rate by 100 basis points over the last three meetings of 2024.
Afterwards, Chairman Jerome Powell described monetary policy as “moderately restrictive” and said it was “well-positioned” to respond to economic developments. As he had before, Powell allowed for easing if the labor market were to show unexpected weakness, but as of July 30 he contended the economy was “not performing as (if) a restrictive policy is holding it back inappropriately.”
With inflation above target and unemployment “at goal,” Powell said, “When we have risks to both goals, one of them is farther away from goal than the other and that’s inflation . … That means policy should be tight because tight policy is what brings inflation down.”
He allowed for shifting to a less restrictive policy if labor markets were to move further from the Fed’s “maximum employment” goal. “If you came to the view that the risks of the two were more in balance, that would imply that policy shouldn’t be restrictive. It should be a more neutral stance. And that would be somewhat lower than we are now.”
That was two days before the Labor Department reported a sharp slowing of payroll gains to just 73,000 in July, coupled with a staggering 258,000 downward revision to May and June payrolls. The unemployment rate rose just a tenth to a still low 4.2%, but stays on the unemployment roles lengthened.
Since the meeting, Fed officials have reaffirmed their commitment to bringing inflation down to target, but have put increased weight on downside risks to the labor market. At the same time, they have expressed differing views on the inflation outlook, with some continuing to warn that tariff hikes will increase price pressures while others have expressed greater confidence that tariff effects will not greatly impede further progress against inflation.
This week’s remarks reflected the schism, which should not be terribly surprising, considering that seven of 19 FOMC participants anticipated zero 2025 rate cuts the last time the Committee published its Summary of Economic Projections in June. A new SEP will be published in conjunction with the Sept. 16-17 FOMC meeting.
Goolsbee cited “warning signs” flashing in the labor market, but said he’s also still uncertain about how tariffs will affect costs and prices..
Before April 2, when President Trump announced his “Liberation Day” tariff campaign, he said the economy “looked pretty good; growth was solid, and the labor market was consistent with stable full employment ..inflation got way too high, but had been coming down, on a path to get back to the 2% target.”
“In a world like d that where you’ve got stable full employment, solid growth. (and diminishing inflation), I thought rates should go from where they are now to where you think they’re going to settle,” Goolsbee said, apparently referring to the FOMC’s 3.0% estimate of the longer-run or “neutral” funds rate.
However, the FOMC must “make sure if we’re still on that golden path,” he told a Chicago Fed-sponsored monetary policy luncheon in Springfield, Illinois, because “tariffs are a stagflationary shock … that can make both sides of dual mandate go bad at same time.”
Goolsbee said he has become less worried about the impact of tariffs since April 2, as numerous trade deals have been struck and exemptions granted, but said he is still somewhat concerned about how they will affect both sides of the Fed’s dual mandate. And he suggested the FOMC will have to carefully weigh the risks at its next meeting.
“As we go into the fall these are going to be some live meetings,” he said. “We’ll have to figure out and try to get timing right when there are moments of transition (we’ll be) grappling with (the question of) are we still on the golden path, or are we getting into something where costs are rising again, then we have to be a little uneasy.”
Asked the biggest risk facing the economy and the Fed, Goolsbee replied, “We’re on a highway … we could fall off either side, One risk is we get back to where costs are rising – we’ve been above 2% (inflation) for four and a half years – if we get into an environment … where (inflation) is not coming down and is going the wrong way the Fed would have to act.”
Despite last month’s slowing of job growth, Goolsbee said, “I think the state of the labor market is pretty strong. We’ve backed off of white hot … and moved to kind of traditional, sustainable, full employment type model … is my read,”
Bostic, who until recently said he expects only one 25 basis point rate cut this year, suggested he might be willing to support multiple rate cuts, but not unless he becomes more certain about the outlook.
Recalling periods where the Fed has changed its mind about monetary policy, only to change it back in light of new evidence, Bostic said the FOMC should “try not to do that, try not to bounce around …. . We should.wait until we have a litttle more clarity where we’re going.”
“We have the luxury to do that because the labor market has been pretty much at full employment,” he continued, calling 4.2% unemployment “remarkably low.”
Bostic went on to say the “maximum employment (mandate) is not at risk in the same way as our inflation mandate … so I feel like we have some space.”
However, he observed that the July employment report suggests the labor market is “a lot weaker maybe there is more imbalance..and maybe we should be thinking about whether we need to be less patient.”
“How much labor markets have weakened.” and how long the FOMC should “be patient, … that’s our task..the next five weeks,” Bostic added.
The day before, officials’ comments were more hawkish.
Schmid showed little inclination to cut rates anytime soon, saying “the economy continues to show strong momentum” and adding that he is “hearing increased optimism as some of the uncertainty and concern around trade policy that spiked in April recedes.”
So the FOMC voter saw little reason to contemplate easing yet despite softer job numbers. “By my assessment, the Fed is as close to meeting its mandate as it has been for quite some time.,”
“The unemployment rate in July was 4.2%, very close to what many economic forecasters would estimate as the full employment rate,” he continued in a speech to the Southern Economic Development Council Annual Conference. “While it is true that payroll growth was weak over the summer, a broader set of indicators suggest a labor market that is in balance.”
Schmid pointed out that “on the other side of the mandate, inflation remains too high.” And that’s where he thinks the FOMC’s main focus needs to stay for the foreseeable future. “With the economy still showing momentum, growing business optimism, and inflation still stuck above our objective, retaining a modestly restrictive monetary policy stance remains appropriate for the time being.”
“My support for a patient approach to changing the policy rate is based on two connected arguments,” he went on. “First, while monetary policy might currently be restrictive, it is not very restrictive. And second, given recent price pressures, a modestly restrictive stance is exactly where we want to be.
Besides, he disagreed with more dovish colleagues who argue that monetary policy is too tight.
Rhetorically asking “how much is the current stance of policy restricting the economy?” he replied, “not very much . … I do not see strong evidence of a trend movement away from our mandates at this point. This all suggests to me that the stance of monetary policy is not far from neutral.”
Schmid reiterated that “ a modestly restrictive policy stance as appropriate given the recent inflation data. While increased tariffs seem to be having a limited effect on inflation, I view this as a rationale for keeping policy on hold rather than an opportunity to ease the stance of policy.”
Barkin, who is not voting this year, was more ambiguous, but he too made clear he is not yet convinced of a need to cut rates soon when the economy remains so strong and inflation elevated.
Repeating his familiar driving analogy, he said ““It’s really hard to drive when it’s foggy.” But he said “the fog is lifting. The tax bill has passed. Net immigration is down. Deregulation is underway. Tariff deals are being nailed down. Business, consumer and market sentiment have started to rebound.”
Barkin said, “Consumer spending would need to pull back more fundamentally “for the economy to stall, but said he “take(s) comfort in the underlying dynamics. Unemployment is low. Real wages are up. Asset values are high. It’s hard to envision a sustained consumer pullback in such an environment.”
The Richmond Fed chief acknowledged that “Job gains have slowed recently, which is certainly worth watching,” but added he is “hopeful that even as businesses face cost and price pressure, they’ll largely avoid the type of large layoffs that would spike unemployment and lead to consumer pullback….So, any coming increase in the unemployment rate may well also be less than many anticipate.”
Besides, he noted, inflation “remains above the Fed’s 2% target.”
Looking ahead to future FOMC rate decisions, Barkin cautioned, “We may well see pressure on inflation, and we may also see pressure on unemployment, but the balance between the two is still unclear. As the visibility continues to improve, we are well positioned to adjust our policy stance as needed.”
Preceding this week’s Fed official commentary, Gov. Michelle Bowman, one of two governors who dissented against holding the federal funds rate steady at the July 29-30 FOMC meeting, voiced unusually strong support for a less restrictive monetary stance on Saturday, saying that the weak July employment report had reinforced her view that the FOMC should cut the funds rate at each of this year’s three remaining scheduled meetings.
She conceded that “the U.S. economy has been resilient so far this yea,” and that “the labor market appears to remain near estimates of full employment.” but she noted growth “has slowed markedly” and the labor market is showing “signs of fragility.”
Bowman downplayed inflation fears ahead of the July CPI report, saying that “after removing estimates of one-off tariff effects on goods prices, core PCE inflation would have been lower than 2.5% in June, which is significant progress and much closer to our 2% target.”
In her view, it’s time to pay less attention to inflation and more to unemployment. “In terms of risks to achieving our dual mandate, as I gain even greater confidence that tariffs will not present a persistent shock to inflation, I see that upside risks to price stability have diminished. With underlying inflation on a sustained trajectory toward 2%, softness in aggregate demand, and signs of fragility in the labor market, I think that we should focus on risks to our employment mandate.”
Bowman suggested the FOMC needs to be more forward-looking and act now to forestall greater labor market weakness.
“Because changes in monetary policy take time to work their way through the economy, it is appropriate to look through temporarily elevated inflation readings and therefore remove some policy restraint to avoid weakening in the labor market,” she said.
“Beginning to move our policy rate at a gradual pace toward its neutral level will help maintain the labor market near full employment and ensure smooth progress toward achieving our dual mandate,” Bowman continued. “I see the risk that a delay in taking action could result in a deterioration in labor market conditions and a further slowing in economic growth.”
“A proactive approach in moving policy closer to neutral, from its current moderately restrictive stance, would help avoid a further unnecessary erosion in labor market conditions and reduce the chance that the Committee will need to implement a larger policy correction should the labor market deteriorate further,” she added.
Bowman revealed that she has been projecting three 25 basis point rate cuts this year and said “the latest labor market data reinforce my view.”
Her fellow dissenter Gov. Christopher Waller had previously been just as emphatic, declaring after the FOMC meeting and before the employment report, “With underlying inflation near target and the upside risks to inflation limited, we should not wait until the labor market deteriorates before we cut the policy rate.”
Also last week, fellow Governor Lisa Cook called the July employment report “concerning” and warned that the large downward revisions of the type announced by the Labor Department have often signaled “turning points” in the economy. She also suggested the economy may be vulnerable to financial instability arising from “quite elevated” stock prices.
San Francisco Fed President Mary Daly expressed confidence inflation will continue to move lower, while expressing greater worry about the “softening” labor market. She said the Fed will “likely need to adjust policy sometime in the coming months,” warning that waiting too long would risk being “too late.”
Minneapolis Fed President Neel Kashkari called for two 2025 rate cuts. “The economy is slowing, and that means in the near term it may become appropriate to start adjusting,” he told CNBC, adding that two 25 basis point cuts by the end of the year “seems reasonable to me.”
On the other hand, other FOMC voters have remained more reluctant to cut rates in the near term. Last Friday, voting St. Louis Fed President Alberto Musalem said “”there are risks on both sides of our mandate, and when that happens, when you have risks on both sides, you have to take a balanced approach, which means you have to think about the likelihood of missing on each side of the mandate, the size of the potential miss, and how long that miss will be in place. That’s the balancing act that we’re doing right now.”
Complicating the FOMC’s decision making, President Trump has turned up the pressure on Powell and his colleagues to slash the funds rate, demanding it be lowered by 300 basis points.
Treasury Secretary Scott Bessent, who had been mentioned as a possible successor to Powell before saying he was not interested in the post, got into the act Wednesday, calling for 150-175 basis points of easing. “I think we could go into a series of rate cuts here, starting with a 50 basis point rate cut in September,” he told Bloomberg.
Trump has also filled a Federal Reserve Board vacancy left by the sudden resignation of Adriana Kugler with one of his own – Council of Economic Advisors Chairman Stephen Miran. Miran, whom economist Robert Brusca has described as “a fox in the henhouse,” is not expected to be confirmed by the U.S. Senate in time to participate in the September FOMC meeting.