Key Takeaways
- Four Federal Reserve officials spoke publicly after this week’s inflation report, and none called for the central bank to cut interest rates.
- Financial markets are nonetheless pricing in a 100% chance the Fed will cut rates at its next meeting in September. Investors are betting the Fed will cut rates to support the job market, which slowed down unexpectedly this summer.
- Fed officials may cut rates to boost the economy, but have been reluctant to do so because lower borrowing costs on loans could stoke inflation that’s still above the Fed’s goal of a 2% annual rate.
Financial markets are pricing in a 100% chance that the Federal Reserve is about to cut interest rates, but several policymakers didn’t seem so sure in recent speeches.
Four Federal Reserve officials spoke on Tuesday and Wednesday, highlighting the central banks dilemma of whether or not to cut its key interest rate at their next meeting in September. None of them committed one way or the other.
Financial markets are pricing in near-certainty that the Fed will cut its key interest rate to lower borrowing costs and boost the economy, according to the CME Groups FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
Fed officials have kept the fed funds rate higher than usual to subdue the last embers of the post-pandemic inflation flare-up. They have held it at a range of 4.25% to 4.5% since December.
However, the Fed could lower rates to prevent a severe rise in unemployment. Congress has tasked the central bank with a dual mandate of keeping inflation low and employment high.
The Feds dilemma is that President Donald Trumps tariffs threaten both sides of its dual mission: Higher prices could stoke inflation and discourage job growth at the same time. Recent economic data has shown job growth slowing and inflation rising further from the Feds 2% annual goal.
Heres what members of the Feds policy committee have said about the possibility of a September rate cut in recent days:
Bostic: Bank Has ‘Luxury’ to Wait And See
With unemployment running low despite the recent slowdown in job growth, the Fed has time to wait and see whether inflation or unemployment is the biggest threat, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in an event at a community college in Alabama Wednesday.
The central bank should try to wait till we have a little more clarity on where things are going, Bostic said. I feel like we have the luxury to do that today, because the labor market has been pretty much at full employment.
Bostic said the bank should try to avoid flip-flopping between different monetary policies like it did in the 1970s, which was damaging to the economy.
Bostic is part of the Federal Open Market Committee but is not currently among the 12 members who vote. Members of the committee who are allowed to vote rotate each year.
Goolsbee: ‘There’s Not An Obvious Answer’
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said he was “uneasy” about the potential for tariffs to stoke inflation, as importers pass the cost of the tariffs along to shoppers.
At the same time, he said he was worried about their impact on the job market and that the tariffs could cause stagflation, a nasty combination of economic stagnation and high inflation.
Tariffs, in my view, are a stagflationary shock, he said Wednesday at a local chamber of commerce event in Illinois. It makes both sides of the mandate go bad at the same time, and thats the worst position that a central bank could be in, because theres not an obvious answer of what you do.
Goolsbee said it was possible the tariffs would produce a one-time rise in prices, but he was worried they could set off longer-lasting inflation, especially if tariffs on things like computer chips cause companies to raise prices on the things made with those materials.
Goolsbee is a voting member of the FOMC.
Schmid: Current Rate ‘Appropriate For The Time Being.’
Jeff Schmid, president of the Federal Reserve Bank of Kansas City, said tariffs seem not to have pushed up inflation at least so far, but that he didn’t think the economy needed the Fed to step in and cut interest rates, at least not yet.
“With the economy still showing momentum, growing business optimism, and inflation still stuck above our objective, retaining a modestly restrictive monetary policy stance remains appropriate for the time being,” Schmid said Tuesday at an economics conference in Oklahoma, according to prepared remarks.
Schmid is a voting member of the FOMC.
Barkin: ‘Unclear’ Whether More Pressure On Inflation Or Employment
Thomas Barkin, president of the Federal Reserve Bank of Virginia, noted risks to both the employment and inflation side of the Fed’s dual mandate, and didn’t commit to either holding the rate steady or cutting it.
“We may well see pressure on inflation, and we may also see pressure on unemployment, but the balance between the two is still unclear,” Barkin said Tuesday at an event in Chicago, according to prepared remarks. “As the visibility continues to improve, we are well-positioned to adjust our policy stance as needed.”
Barkin is not currently a voting member of the FOMC.
Will Hawks Or Doves Win Vote?
Not every Fed official is on the fence. At least two central bankers—governors Michelle Bowman and Christopher Waller—have come out in favor of rate cuts.
The outcome of the September meeting will hinge on whether the economic data over the next few weeks will attract more fence-sitters to Waller and Bowmans side. They voted in favor of a rate cut in July, dissenting from the majority decision.
The vote will be made against a backdrop of intense political pressure from the White House, as Trump and other administration officials have demanded rate cuts with increasing frequency.
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