Debate within Fed heats up

June 10, 2024

Federal Reserve Chairman Jay Powell is known for his ability to corral the cats when it comes to overall policy decisions. That said, views regarding when and if to cut rates have diverged as we get closer to a tipping point. He has stated that participants at the last meeting saw the risks to the economy as fairly balanced. However, the Federal Reserve’s insistence on “data dependence,” the cumulative effect rate hikes have on economic activity and the high level of policy uncertainty stemming from the election all risk an overtightening of monetary policy.

For the moment, the data on inflation are still too hot, although we will get another read on inflation during the June Federal Open Market Committee meeting. Participants are scheduled to release their forecasts for growth, inflation, unemployment and the trajectory for rate cuts they deem appropriate for those forecasts. The forecasts for growth and inflation are expected to edge lower, while unemployment remains unchanged. The trajectory on rate cuts, which was narrowly for three rate cuts at the March meeting, is expected to move to between one and two cuts for the year. Participants at the May meeting discussed the potential for rate hikes. Powell is expected to convince lone participants from writing a hike into their trajectory on rates but that doesn’t rule out at least one person penciling in no cuts for the year. 

Powell has been more concerned than some of his peers about hitting a trip wire and triggering an unexpected weakening in employment. Data dependence means that the Fed is reacting to yesterday’s news, which means that officials will be late in reacting to any deterioration in employment. He has used the word “nonlinear” when talking about the risks to unemployment. When it rises, it tends to do so rapidly.

The message of the meeting will be higher for longer with a willingness to pivot in response to a major shift in the data. The persistence of service sector inflation, in which structural factors, including the losses due to extreme weather events, is a sticking point. That means that other prices have to decelerate or fall to get close to the Fed’s 2% target. The goal is to remove inflation from being top of mind in our collective spending decisions.