The Federal Reserve is facing internal disagreements regarding the future path of interest rate cuts, with critical insights stemming from Chairman Jerome Powell and Governor Christopher Waller's positions.
As of October 17, Bank of America Securities published a report noting that amidst the current government shutdown leading to data unavailability, both Powell and Waller's viewpoints will significantly influence the Fed's policy direction.
Powell, as Chair of the Fed, not only possesses voting rights on the Federal Open Market Committee (FOMC) but also leads discussions and has a dominating voice in external communications. His perspectives often set the tone for the policy landscape.
Waller is unique in publicly acknowledging that he is "interviewing" for the Fed chairmanship, lending his words an influential nature. Notably, he is regarded as one of the most influential doves on the committee, and any shift in his stance could indicate a broader policy adjustment.
Currently, both Powell and Waller seem inclined towards a 25 basis point cut in both October and December. However, should inflation and employment data remain robust, the Fed might choose to hold its position in December, which poses a key risk for the markets.
**Powell's Position: Dovish but Data-Dependent** This week, Powell reiterated his dovish stance, stating:
"Since the September meeting four weeks ago, the outlook for employment and inflation appears unchanged."
Despite acknowledging the robust GDP and expenditure data released post-September meeting, Powell downplayed their importance, emphasizing the downward risks to the labor market and suggesting that a further decline in job vacancies could lead to higher unemployment.
The report from Bank of America suggests that Powell may internally "most likely wants" to cut rates once in October and again in December. However, it also notes that if the economic conditions—such as a stable job market and sticky inflation—do not align with a rate cut, he may reconsider, leaning towards pausing rate reductions in December.
**Waller's Position: Dovish but Shifting** Governor Waller remains one of the more dovish members of the FOMC. This week, he echoed Powell's sentiment, asserting that there has not been significant change since September’s meeting. Waller expressed skepticism about the slowing labor supply and exhibited a diminished concern regarding inflation risks stemming from loose financial conditions or tariffs.
Nonetheless, there has been a subtle shift in Waller’s recent comments. He indicated that following the October meeting (where he hopes for a rate cut), he will "watch how strong GDP data aligns with a weak labor market." He acknowledged that the inflation rate, excluding tariffs, hovers around 2.5%.
According to Bank of America, Waller's base case still envisions a 25 basis point cut in both of the upcoming meetings, with potential for additional cuts next year. However, his recognition of strong GDP suggests he may now be open to pausing rate cuts in response to evolving economic conditions, contrasting with his previous strong advocacy for reducing rates to a neutral 2%.
**Dovish Governors vs. Hawkish Regional Fed Presidents** The current FOMC landscape reveals distinct internal disagreements; under Powell's leadership, the board leans dovish, while the voting regional Fed presidents tend to adopt a more hawkish stance.
Internally, the dovish faction prevails, but there are notable dissenting views:
- Vice Chairman Jefferson: Slightly less dovish than Powell, he expresses concerns about persistent core services inflation. - Governor Barr: His stance reflects a "hawkish surprise," worrying that inflation may remain elevated for too long, indicating he may support only one rate cut this year. - Governor Bowman: Aligns closely with Waller, advocating two more 25 basis point cuts this year. - Governor Miran: A clear "super dove," suggesting a total cut of 150 basis points this year, marking the lowest point in the dot plot.
Conversely, the voting regional Fed presidents show a clearer hawkish tendency:
- Williams (New York Fed): More dovish than expected, supports further rate cuts this year. - Goolsbee (Chicago Fed): Recently adopted a hawkish stance, concerned about potential inflation. - Schmid (Kansas City Fed): Clearly states that no further cuts may be necessary in 2025. - Musalem (St. Louis Fed): Warns against excessive easing and believes only one rate cut may be warranted this year.
This divergence between the dovish board and the hawkish regional Fed presidents raises the likelihood of dissenting votes during any rate cuts in October and December.
**Bank of America's Rate Predictions** Despite varied remarks from Fed officials, the ultimate decision-making power lies with the economic data.
Bank of America anticipates a 25 basis point cut in October, while expecting to pause further reductions in December, contingent on stable employment data and persistent inflation.
A significant delay in data release due to the government shutdown or a sharp rise in unemployment could trigger another rate cut in December.
Bank of America's forecast includes a 0.3% month-on-month increase in September's core CPI with a year-on-year rise of 3.1%, figures likely insufficient to alter the Fed's course. Additionally, they expect the October S&P Global US Manufacturing PMI to decline from 52.0 to 51.0 due to escalating trade tensions.
In conclusion, investors should not assume two rate cuts before year-end are a certainty. Powell's data reliance and Waller's nuanced shift offer variability for the December policy path. Upcoming inflation and employment reports will be crucial in determining whether the Fed remains steadfast or adopts a more cautious stance.