Fed officials are divided on interest rates

Officials at the Federal Reserve are divided over how to set the central bank’s key interest rate in the coming months, and they may not get the data they need to settle their differences anytime soon.

As evidenced by recent speeches and the minutes of the September meeting, division among FOMC members has begun. One group is more concerned about the deteriorating labor market and believes the Fed should cut its benchmark interest rate significantly to avoid job losses. The other group sees inflation as the biggest threat, and calls for a more cautious approach to lowering interest rates.

Investors widely expect the Fed to cut interest rates by a quarter of a percentage point at each of its next two meetings. However, the path after that is more uncertain, according to CME Group’s FedWatch tool, which forecasts interest rate movements based on federal funds futures trading data.

Fed officials are trying to balance the requirements of their dual mandate from Congress to keep inflation low and employment high. The Fed can help a struggling labor market by lowering its key interest rate, or it can fight inflation by keeping it high, but it cannot do both at the same time. Members of the Fed’s 12-member policy committee have different views on how to deal with this dilemma.

In the “cautious” camp, Austin Goolsbee, president of the Federal Reserve Bank of Chicago, warned against cutting interest rates too quickly in an interview with the Financial Times on Monday.

Tariff policies have pushed inflation measures higher in recent months and kept them above the Fed’s target at an annual rate of 2%. However, many economists believe that tariffs will be a one-time boost to prices and will not lead to an inflationary spiral. Goolsby said he was cautious about making that assumption in the wake of the pandemic, when what was initially thought to be a temporary increase in prices due to supply chain disruptions led to a worrying rise in inflation in 2022.

“Let’s be a little bit cautious about implementing all the interest rate cuts initially before we know inflation is going to get back to 2%,” Goolsby said.

On the far end of the other camp, Federal Reserve Governor Stephen Meiran has called for sharp interest rate cuts, arguing that President Donald Trump’s economic policies will ultimately lower inflation.

Healthy discussion

The Fed’s policy committee tries to reach consensus on interest rate moves, and typically votes unanimously at its policy meetings. But several members cast dissenting votes at its recent meetings, highlighting differences of opinion on the strategy.

Economic data on inflation and job losses can indicate whether inflation or unemployment is the more pressing threat to the economy, but the ongoing government shutdown has delayed major reports on these topics.

Federal Reserve Chairman Jerome Powell acknowledged the differences Tuesday in a question-and-answer session at an economic conference in Philadelphia.

“Consensus is great, but the most important thing of all is getting it right,” Powell said. “We have a situation here where inflation is above target and rising gently. The labor market is exposed to very clear downside risks. What do you do? How do you think about that? This is not a problem that we often have in central banks or in economics, and people will have different weights and different risk aversion and different risk appetite on these things. It would be kind of surprising if you didn’t have any discussion about these things.”