The Fed’s December Open Market Committee meeting

The Fed’s December Open Market Committee meeting

This next Open Market Committee meeting will be one of the most interesting is recent times. It will be a test to see which side prevails, the one most concerned with inflation or the one most concerned with unemployment. Although I am one who thinks that the Fed should jettison its dual mandate and concentrate only on inflation, I realize that others disagree. Nonetheless, a reduction in the Fed funds rate will not have a direct impact on employment. In fact it may not have even an indirect impact. In these days, it appears that there is more displacement due to technological change than there is due to slack demand. So lowering interest rates will have little effect on unemployment but rather will add to the inflationary pressures.

Chairman Powell indicated at the annual Jackson Hole conference that there were going to be three rate decreases this year. There have been two. Will there be three? New York Fed president Williams has indicated as much. In a speech given in Chile (these central bankers love their junkets), Williams said that interest rates could fall without putting the Fed’s inflation goal at risk, while helping guard against a slide in the job market. “I view monetary policy as being modestly restrictive…Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral.” Williams, who has a permanent seat on the FOMC and is considered an ally of Chairman Powell, is not likely to make such a statement unless endorsed by the chairman.

However, other Fed presidents appear not to be on board. Kansas City president Schmid, who dissented at the last cut has not changed his view. Boston Fed president Susan Collins thinks that the current rate is about in the right place. So does Dallas president Lorie Logan who favors no change too. Logan, who is a protegee of New York’s Williams seems to disagree with him and said “In the absence of clear evidence that justifies further easing, holding rates steady for a time would allow the FOMC to better assess the degree of restriction from current policy.”

There is something called the CME FedWatch Barometer that gives odds of a rate cut. It is obviously confused. After the Jackson Hole meeting it gave odds of 92% for a rate cut. Then the odds fell to 32% after the last meeting of the Open Market Committee. Now with Williams speech the odds are back up to 73%. I think it may be closer to 50-50.

Some say that all this indicates that the members of the committee are sharply divided as to what to do. Those divisions were shown in the release of the minutes from the last FOMC meeting with the two dissents. Three dissents are extremely rate and a vote with more would indicate that Powell has lost control of the committee. It will be interesting to see how markets would react. Traditionally, the reserve bank presidents who are more insulated from the pressures of Washington are more conservative in their policy decisions than are the governors.

We all know that the president wants lower rates. He has badgered Powell to lower the Fed funds rate to a rate as low as one percent. His surrogate at the Fed, Stephen Miran will press for a 50 basis point cut but will fail. What is interesting is that Lisa Cook and Philip Jefferson are expert labor economists and have a special interest in unemployment issues. Their inclination would be to vote for a decrease in the rate – which would be interesting in the case of Cook who Trump is trying to fire. It would also be particularly interesting if Powell votes for a cut given all the vitriol hurled at him by the president who recently said, and I quote, “I’ll be honest, I’d love to fire his ass.”

Trump, obviously, doesn’t intimidate Powell. It would be human for Powell to push for a rise in the rate just to strike back at the president. However, that has not happened. Rather his comments show restraint and dignity. I presume that he will continue to do what he thinks is best for the country and seek to persuade the other members of the committee to do so as well. In the end, I think we will see nine OMC members inclined to cut (Powell, Williams,Miran, Waller, Barr, Jefferson, Cook, Bowman and Goolsbee), and three against (Collins, Musalem and Schmid).