WashingtonIn a show of discord at the Fed that reflects the uncertain future for the economy and perhaps the competition to succeed Chair Jerome Powell when his term ends in May 2026, two senior Fed officials may disagree with the central bank’s probable decision on Wednesday to keep its main interest rate unchanged.
Governors Christopher Waller and Michelle Bowman might vote against keeping the short-term rate at roughly 4.3% based on their actions over the last two months. If this is true, it would be the first time in more than thirty years that two governors have disagreed.
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If President Donald Trump selects a successor who advocates for the significantly lower interest rates the White House wants, the split may be a sign of what might occur after Powell leaves. If a future chair wanted to lower rates more than the economy would ordinarily allow, other Fed members might object.
Any opposition for the time being would also probably highlight the fact that there are at least two perspectives on the American economy, which is obviously changing. The first is the description given by the majority of Fed officials: While the economy is expanding, albeit slowly, unemployment is rising, and tariffs are mostly to blame for inflation.
Therefore, the reasoning goes, why not maintain rates and watch what occurs next? A rate drop might make matters worse if inflation keeps getting worse. The Fed usually raises borrowing costs to fight inflation. Furthermore, cutting is not necessary to encourage growth as long as the economy is doing well.
The other perspective is more concerning: There are indications that the economy is deteriorating, including relatively slow overall growth. The economy most likely grew at an annual rate of roughly 1.5% during the first half of the year. However, tariffs have so far had less of an impact on inflation than many economists had anticipated.
Waller expressed similar opinion about the economy earlier this month.
Payroll growth in the private sector is almost at a standstill, according to Waller. We should lower the policy rate now rather than waiting for the labor market to worsen.
Lower borrowing prices for credit cards, auto loans, and mortgages are frequently the result of the Fed’s rate reduction.
Waller’s worries about the labor market are shared by several economists. Just 74,000 new jobs were created in the economy in June, excluding government hiring, with the majority of those increases taking place in the health care sector.
According to Tom Porcelli, chief U.S. economist at PGIM Fixed Income, we are in a lot slower job hiring environment than most people realize.
During his first term, Trump named Waller to the Fed’s seven-member governing board. He has frequently been brought up as Powell’s possible replacement. In multiple presentations, Waller has emphasized that he does not believe Trump’s tariffs will result in consistently rising inflation.
During Trump’s first term, Bowman was also chosen as the vice chair for regulation. She believes that the Fed should lower borrowing costs shortly. Although it is more unlikely, Bowman might possibly replace Powell.
In a note to clients this week, JPMorgan Chase economist Michael Feroli stated that if the pair were to dissent, it would be more about trying out for the Fed chair position than it would be about the state of the economy.
Following a week of meetings with the Trump White House, which has charged Powell with mishandling a massive $2.5 billion refurbishment of two office buildings, the Fed will convene for two days. Trump has subsequently retracted his suggestion that the project’s growing cost could be grounds for termination, which he made two weeks ago.
Notably, Trump contends that the Fed should lower interest rates because the economy is doing so well. This is in contrast to almost all economists who believe that rate reduction are unnecessary for a robust, expanding economy.
According to Porcelli, you should have higher short-term rates if your economy is doing well.
