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The Fed is at odds with itself. It’s a feature, not a bug

A version of this story first appeared on CNN Business’ Before the Bell newsletter. Not a subscriber ? You can register here. You can listen to an audio version of the newsletter by clicking on the same link.


The Federal Reserve has a complicated decision to make at its next policy meeting, which is just a few weeks away.

All Fed officials agree on the need to beat inflation in a timely manner, but they disagree on whether the central bank has already done enough.

Some officials believe the Fed needs to raise interest rates further to control inflation, while others believe the rate tightening that has been done will continue to further dampen rising prices. It will take about a year for the Fed’s actions to be felt throughout the economy.

San Francisco Fed President Mary Daly said last week that “if we continue to see a slowdown in the labor market and a return of inflation toward our goal, we can keep interest rates stable and let the effects of the policy continue to be felt.” Meanwhile, Fed Governor Michelle Bowman said recently that she continues to “expect that further rate hikes will likely be necessary to return inflation to 2% in a timely manner.”

Simply put, Fed officials are divided because the future of the economy is riddled with many uncertainties.

It’s simply not clear whether inflation will slow further as employers continue to hire at a brisk pace or whether the bond market sell-off will constrain the economy just enough to bring inflation down. Additionally, it’s unclear how much this month’s resumption of student loan payments will weigh on spending, given that the Biden administration recently approved some debt relief.

So Fed officials are divided, but it doesn’t really matter. Divergent opinions within the Fed are simply a characteristic of central banking during pivotal moments like the one we are experiencing now.

“In general, it should be considered a good thing that they have different opinions. This is arguably a design feature of the committee: diverse viewpoints are expressed, otherwise there is a risk of groupthink,” wrote Michael Feroli, chief U.S. economist at JPMorgan, in a statement to CNN.

Fed officials are still people, and as the saying goes, opinions are like belly buttons in that everyone has one.

The Federal Open Market Committee, the Fed’s panel that sets monetary policy, has made unanimous policy decisions at almost every meeting throughout the rate-hike cycle that began in March 2022.

“It is also not surprising that the decisions were unanimous. The Fed started from a starting point so late that catching up was an obvious decision. Now that we’re getting closer to the end, we’re seeing more differences open up,” Feroli said.

Fed officials who are members of this committee with voting rights have the opportunity to express their disagreement, but that has only happened twice this cycle. The latest dissent was from former Kansas City Fed President Esther George more than a year ago.

This is where a division can matter: if several leaders disagree. But it’s extremely unlikely, even at the moment.

“Dissent simply means that someone violently opposes the decision made by the group. You have to have a very high degree of conviction to do that,” Ed Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle Investments, told CNN.

“Both sides have very valid arguments and one side is trying to convince people on the other side,” he said.

Al-Hussainy added that even if an official disagreed, it “wouldn’t mean much.” JPMorgan’s Feroli said that “historically, more than one dissent was a sign of a sharply divided committee.”

“I think that’s probably still the case and I would be surprised if we see more of a dissent in the near future,” Feroli added.

It should also be noted that the voting members of the FOMC change at the beginning of each year.

In total, the FOMC has 12 voting members. Seven of those votes will still come from members of the Fed’s Board of Governors, including Fed Chairman Jerome Powell. The president of the New York Fed, currently John Williams, always votes at meetings. The remaining votes come from four of the Fed’s other eleven regional banks.

This year’s voters, namely Dallas Fed President Lorie Logan, Chicago Fed President Austan Goolsbee, Philadelphia Fed President Patrick Harker, and Minneapolis Fed President, Neel Kashkari, will be replaced next year.

Logan and Kashkari are considered “hawks”, i.e. those who support a tougher stance in the fight against inflation, and the other two are “doves”, i.e. those who fear causing unnecessary economic damage by tightening the Fed further.

Next year’s electors will be the presidents of the federal banks in Cleveland, Richmond, Atlanta and San Francisco. Raphael Bostic of the Atlanta Fed and Daly of the San Francisco Fed would be the two Fed chairs most accommodating to voting rights in 2024.

– Elisabeth Buchwald of CNN contributed to this report.

The Federal Reserve may be facing a dilemma regarding interest rates, but it appears to have enough arguments to continue to keep them stable.

U.S. hiring accelerated last month as employers added 336,000 jobs. This conflicts with Fed officials’ goal of cooling the labor market to bring inflation back to the central bank’s 2% target and is likely to mean a final rate hike will take place during the Fed’s two-day policy meeting coming up in just a few weeks.

However, the recent sell-off in government bonds means the U.S. financial system will become more burdensome on American families and businesses, which in itself could dampen the economy.

The yield on 30-year U.S. Treasuries rose above 5% this week for the first time since 2007, on hopes that the Fed will keep rates high for longer. Friday’s blockbuster jobs report pushed yields even higher.

U.S. Treasuries are the benchmark used to value debt, so higher yields mean higher rates on everything from auto loans to mergers and acquisition costs. An even larger increase in rates could put Americans in an even more difficult financial situation.

The Fed therefore has a difficult decision to make: the bond market rout could cool the economy enough for the Fed to keep rates stable. Or, the Fed could see the resilience of the labor market as a threat to defeat inflation, necessitating another rate hike.

But there is also strong case for a pause, and a majority of investors agree.

As of Friday afternoon, markets estimated there was about an 89% chance that the Fed would decide to keep rates steady again at its Oct. 31-Nov. 1 meeting, according to the CME FedWatch tool.

Here are the arguments for another pause: Higher Treasury yields and tighter bank lending standards will continue to constrain the economy, further dampening inflation, but rates could remain high for a long time due to resilience of some underlying inflationary pressures, particularly in services. sector.

Read our full coverage of the September jobs report here.

Monday: Fed officials Lorie Logan, Michael Barr and Phillip Jefferson deliver remarks.

Tuesday: PepsiCo earnings. The National Federation of Independent Business releases its Small Business Optimism Index for September. Fed officials Raphael Bostic, Christopher Waller, Neel Kashkari and Mary Daly deliver remarks.

Wednesday: The US Department of Labor releases its producer price index for September. Fed officials Christopher Waller and Raphael Bostic deliver remarks. The Federal Reserve releases the minutes of its September policy meeting.

THURSDAY: Gains from Domino’s, Walgreens and Delta. The US Department of Labor releases its Consumer Price Index for September. China’s National Bureau of Statistics releases September data on inflation and the country’s customs agency releases September data on trade flows.

Friday: The U.S. Department of Labor releases export and import prices in September. The University of Michigan releases a preliminary reading of consumer confidence in October.


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