By Steven K. Beckner
(MaceNews) – As their mid-March monetary policy meeting draws nearer, Federal Reserve policymakers are seemingly becoming more firmly ensconced in a wait-and-see posture, hoping for more statistical clarification of the progress they’re making toward the Fed’s dual mandate objectives of “maximum employment” and “price stability” before considering further interest rate adjustments.
Recent data showing an apparent stalling out, if not reversal, of disinflation, coupled with surprisingly strong job gains, have left most Fed officials unwilling to take any additional steps toward monetary easing for the foreseeable future.
At the same time, the evidence on both the employment and inflation fronts is sufficiently hazy to make the outlook very uncertain, leaving some to think that the Fed may eventually need to resume interest rate reductions.
Contributing to monetary indecision is uncertainty about various extraneous forces, such as the eruption of Artificial Intelligence (AI) and its impact on productivity and the impact of tariffs in wake of a Supreme Court decision striking down President Trump’s authority to impose them under an emergency law.
For now, the clear consensus on the Fed’s policymaking Federal Open Market Committee is to leave the federal funds rate in the target range of 3.5% to 3.75% that it’s been in since the FOMC last lowered the policy rate on Dec. 10.
The predominant view is that presently there is simply no need to inject more monetary stimulus into an economy that seems to be perking along at relatively low levels of unemployment, especially when there are other prospective sources of fuel for growth and especially when inflation remains stubbornly high. So, the majority feels no urgency to un-pause policy.
Even the more outspoken proponents of monetary easing have been pulling their punches of late.
Fed Gov. Christopher Waller, who dissented against keeping rates unchanged at the late January FOMC meeting because he wanted another 25 basis point rate cut, said Monday he’s prepared to support a continued “pause” in rate-cutting next month if he can be convinced the labor market is stronger than he believes it to be.
For now, pending more conclusive data, he considers the FOMC’s March 18 rate decision “a coin flip.”
Chicago Federal Reserve Bank President Austan Goolsbee, who voted for the December rate cut but has since spoken against doing more, said Tuesday he hopes to get back to easing, but not until he can be persuaded that inflation is headed down to 2%.
Others sound even more disinclined to return to lowering rates.
Kansas City Federal Reserve Bank Jeff Schmid, who dissented against the October and December rate cuts in favor of leaving rates unchanged, continued Wednesday to stress the need to lower inflation, not support a labor market which he believes to be sufficiently strong at this time.
St. Louis Fed President Alberto Musalem expressed less alarm about inflation Wednesday, but he too suggested there is no need to change monetary policy, saying it is “well-positioned” and is “balancing” between risks to full employment and still elevated inflation.
After cutting the funds rate by 75 basis points in the last four months of 2025, and 175 basis points since September 2024, the FOMC left that policy rate in a target range of 3.5% to 3.75% on on Jan. 28. Governor Stephen Miran joined Waller in dissenting in favor of another 25 basis point cut.
In their last Summary of Economic Projections (SEP), published Dec. 10, the 19 FOMC participants anticipated just one 25 basis point rate cut in 2026. Some officials want more rate cuts, while others want none.
The Dec. 10 rate cut pause left the median funds rate of 3.6% 60 basis points above the Committee’s 3.0% estimate of the “longer run” or “neutral” rate, and three Fed governors (Waller, Miran and Bowman) have argued for more rate cuts on the grounds that the current funds rate target remains too restrictive relative to that “neutral” rate. Others sharply disagree, contending the funds rate is already at or near neutral.
Minutes of the late January FOMC meeting reflected a preponderance of anti-inflation sentiment, and that does not seem to have changed much over the past month.
Schmid continued to be outspokenly in favor of focusing monetary policy on the inflation side of the dual mandate in a Wednesday “fireside chat” hosted by the Economic Club of Colorado in Denver.
Although the Fed succeeded in achieving a “soft landing” by “managing 8-9% inflation back to target without braking the economy into recession,” he said, “I think we have work to do on the inflation side of things.”
Noting that the unemployment rate stands well below the 6% level that used to considered “full employment,” Schmid said, “I think we’re in a pretty good place for employment.”
But with inflation running “closer to 3% than to 2%” for the past year, he said, “I don’t think we’ve reached target. We still have work to do.”
Calling inflation “an economic thief” that is “worse for bottom half of the wage-earning public,” he said “inflation is a really bad thing.”
Musalem, who unlike Schmid voted for all of last year’s rate cuts, also talked about the need to get inflation down, but paid somewhat greater attention to labor market risks in Wednesday remarks at the Missouri Athletic Club in St. Louis.
He said the Fed’s two policy goals are “in tension,” with inflation running nearly a percentage point above target and with a labor market “that’s been cooling,” but seems to have “stabilized.” He said the FOMC “has to balance between both of them.”
“Right now (monetary policy) is in balance,” he added.
Musalem said his “baseline outlook is that the economy will growth at or above potential off around 2%,” helped by “a lot of tailwinds that will propel the economy forward,” including stimulative fiscal policy, deregulation, the Fed’s 175 basis points of rate cuts and “accommodative” financial conditions. With that growth outlook, he expects unemployment to stay “around the natural rate of unemployment — 4.3 to 4.4%.”
He said, “inflation is above our target by a meaningful amount,” but said half of the overshoot is from tariffs, which he predicted will “go away.”
Musalem said there are two risks to this outlook: first, “in the labor market, while I see it stabilizing, job growth has been narrow …. So the job market is vulnerable to an increase in layoffs.” If there is a rise in layoffs with slow job growth, the unemployment rate could go higher, he warned. The other risk is that “inflation could stay higher for longer” instead of falling to target.
“The risks are roughly in balance right now,” he said. “Monetary policy is balancing between those two risks in an appropriate way.”
Musalem said monetary policy is “neutral right now in real terms.” With the 3.6% median funds rate about one point above the inflation rate, “that’s the real rate that the FOMC judges to be neutral.”
Waller said he’s prepared to support a continued “pause” in rate-cutting at the mid-March meeting if labor market data reinforce the unexpectedly strong January employment report, but said he’ll push for another rate cut if his skepticism about that report is validated.
The Labor Department reported a much larger than expected 130,000 rise in nonfarm payrolls for January, along with a one-tenth downtick in the unemployment rate to 4.3%, but Waller was openly dubious in a Monday speech to the National Association for Business Economics.
“Taken together the data were positive, but not conclusive that the labor market is on a more solid footing and, hence, also not conclusive about the proper setting of monetary policy,” he told the National Association for Business Economics. “One month of good news does not constitute a trend, but a year does, and the year of 2025 was an extraordinarily weak one for job creation—the weakest outside of a recession since 2002. “
Noting that revisions to 2025 payrolls showed a gain of just 181,000 new jobs last year for an average of only 15,000 per month, Waller said “close to zero net job creation over 2025 indicates a weak, and fragile job market.” And he said the January report, with its payroll upsurge, “may contain more noise than signal.”
He pointed out that other recent labor market data, including the Job Openings and Labor Turnover Survey data and the ADP hiring data, were “bleak.”
Waller conceded that the January employment report was “very encouraging,” but said he “will need to see the February report due March 6 before forming any judgment on whether there has been a rebound in the labor market.”
He was equally skeptical about the resurgence of inflation suggested by the January consumer price index report, believing instead that underlying inflation is closer to the Fed’s 2% target and that the main risk for monetary policymakers should be labor market softness.
Waller said the Fed should “look through” tariff price effects.
“PCE inflation has crept up in the past few months, and is meaningfully above the FOMC’s 2 percent goal, but a crucial factor has been the estimated effect of tariffs…,” he said. “I think it is widely acknowledged now that tariff increases have not affected longer-term inflation expectations and thus will only temporarily boost inflation rather than be a source of ongoing inflationary pressure.”
“So, I estimate that what I call underlying inflation—inflation without the effects of tariffs—is close to the FOMC’s 2% goal,” he added.
Waller said his vote on March 18 will depend largely on what the labor market picture looks like at that time.
“Assuming underlying inflation continues to signal we are close to our 2% goal, the key to setting appropriate policy will be my view of the labor market,” he said. “If the labor market data for February are consistent with the stronger job creation and low unemployment rate initially reported in January, indicating that downside risks to the labor market have diminished, it may be appropriate to hold the FOMC’s policy rate at current levels and watch for continued progress on inflation and strength in the labor market.”
“But if the good labor market news of January is revised away or evaporates in February, it would support my position at the FOMC’s last meeting, that a 25-basis-point reduction in the policy rate was appropriate, and that such a cut should be made at the March meeting,” he went on.
“As things stand today, I rate these two possible outcomes as close to a coin flip,” Waller added.
At this point, with key employment, inflation and other data yet to come before the FOMC meets March 17-18, Waller called the rate decision “a coin flip.”
Goolsbee played down labor market concerns while playing up inflation risks when he spoke to the same group Tuesday morning.
“The job market has been steady,” he said.
Goolsbee granted that “a sudden deterioration in the labor market, like those at the start of a recession, could change the policy calculation pretty quickly, and we have experienced an extended period of low aggregate job creation,” but he disputed warnings from the likes of Walker about a weakening labor market.
“Yes, there was little net job creation in 2025, and the first estimates were substantially revised down as the full data came in,” he said. “But I don’t think that says much about the business cycle or labor market slack.”
Noting that the unemployment rate has stayed steady while job growth slowed, Goolsbee said, “The modest aggregate job numbers can’t be far from the true break-even point or else the unemployment rate would have been rising.”
Turning to the other side of the Fed’s dual mandate, he said, “A steady real economy should put the focus back on inflation for near-term monetary policy decisions.”
With inflation running, “well above our 2% target … for almost five years” and with core PCE inflation at 3%, Goolsbee said, “it is not obvious that our interest rate policy is even restrictive. The real federal funds rate measured that way is pretty close or even a bit below the consensus view of long-run r*…”
He added that “3% inflation is not good enough—and it’s not what we promised when the Federal Reserve committed to the 2% target. Stalling out at 3% is not a safe place to be for a myriad of reasons….”
With all that said, Goolsbee said he “remain(s) optimistic that there can be more rate cuts this year. But that hinges on seeing actual progress on inflation that shows we are on a path back to 2%. …(W)e should be careful not to put ourselves in a difficult position.”
“The fact that over the past several months, the date at which the forecasts say inflation will start falling keeps getting pushed back is not a great sign,” he added.
Goolsbee warned that “front-loading too many rate cuts is not prudent in that circumstance. …Before we cut rates more to stimulate the economy, let’s be sure inflation is heading back to 2%.”
Fed Gov. Lisa Cook, who also spoke at the NABE convention on Tuesday, steered clear of short-term monetary policy issues but said the widening use of Artificial Intelligence could have “profound implications for monetary policy” – and not just in the longer run.
“(I)f AI continues to raise productivity, economic growth could remain strong, even as churn in the labor market leads to an increase in unemployment,” she said. “In a productivity boom such as this, a rise in unemployment may not indicate increased slack.”
“As such, our normal demand-side monetary policy may not be able to ameliorate an AI-caused unemployment spell without also increasing inflationary pressure,” she continued. “This means that monetary policymakers would face trade-offs between unemployment and inflation.”
Cook, whom President Trump has sought to fire as part of his campaign to pressure the Fed into slashing rates, also raised the question of “how AI might affect the neutral rate of interest in the short run and over time.”
Although the “neutral” rate is a longer run concept of the equilibrium level of interest rates that is noninflationary and consistent with maximum employment, she said “the AI investment context compels us to understand what is happening in the short run.”
With AI-related business investment already soaring in anticipation of future productivity gains and “contributing to strong aggregate demand,” Cook said “it is possible that the current neutral rate is higher than before the pandemic.”
Asked when the Fed will incorporate AI into its monetary models, Cook said she is “not sure when that will happen,” but said “it’s already being incorporated into our forecasts” in terms of “the activities that go along with AI investment,” such as investment in microchips and data centners.
However, Cook suggested it will be difficult to quantify the economic impact of AI, because labor and total factor productivity are “ notoriously hard to measure.”
Atlanta Fed President Raphael Bostic made a similar point in his last public appearance before retiring at the end of the month. He said the Fed is facing “a lot of turbulence” surrounding AI, tariffs, immigration and other things and said “figuring it out will take time.”
He said “we could potentially be in a transformational period where employers don’t need as many workers as they did before,” i.e. an increase in productivity that would affect Fed calculations of NAIRU (the non-accelerating rate of unemployment) and funds rate neutrality.
For now, Bostic said the Fed needs to remain focused on bringing down inflation, warning, “The longer that we’re not on target, the higher the likelihood that they’ll think we’ll never get to target.”