Why Two Fed Officials Doubt the Need for Many More Rate Cuts

Benchmark Rate Is Already Close to the Goal of Neutral

Two prominent Federal Reserve officials voiced skepticism regarding the necessity for additional interest rate cuts after a series of reductions that have taken place since September. Fed Governor Michelle Bowman and Kansas City Fed President Jeff Schmid stated their belief that the cumulative 100 basis points in rate cuts have effectively brought the Federal Reserve’s benchmark rate to a state they describe as “neutral.” This neutral rate signifies a balance where monetary policy does not impede or stimulate economic demand.

The Concept of ‘Neutral’ Rates

Both Bowman and Schmid emphasized that the objective behind the recent cuts has been to reach this neutral level, indicating that the Fed would only consider lowering rates further if considerable economic slowdown were observed. Schmid remarked, “My read is that interest rates might be very close to their longer-run level now,” during a presentation to the Economic Club of Kansas City. He expressed support for a gradual policy approach moving forward, suggesting adjustments would be considered only in response to significant shifts in economic data.

Moreover, Schmid acknowledged the resilience of the current economy, suggesting, “The strength of the economy allows us to be patient.” This perspective seems shared by other Fed officials, including Chairman Jerome Powell and Governor Christopher Waller, who maintain that current rates are sufficiently high to curb economic activity. Waller explained his stance by asserting, “I do think they are restrictive, but not enough to throw us into recession.”

Current Economic Context and Concerns

In a different address, Bowman expressed her concerns over the present policy stance, indicating it may not be as restrictive as perceived by others. She highlighted the robust growth of the economy and noted that the stock market has surged over 20% within the past year. Although she does not consider it her baseline perspective, Bowman acknowledged the possibility that progress toward addressing inflation could stall.

Schmid’s appointment as a voting member of the Fed’s interest-rate committee marks a pivotal moment, while Bowman, who serves as a governor, retains her voting rights. The divergence of opinions among Fed officials suggests a potentially contentious year ahead. Ellen Zentner, chief economist strategist for Morgan Stanley Wealth Management, pointed out this schism, stating, “I think you are going to see the divide even greater on the Fed after we get the rotation in voters this year.”

The Impact of Upcoming Political Policies

Some clarity regarding the incoming Trump administration’s policies, Bowman argued, might facilitate greater consensus among Fed officials. She advised that the Fed should not “prejudge” the economic plans proposed by Trump and should instead await further information to assess their implications for economic activities, labor markets, and inflation.

Implications for Fed Governance

Bowman also appears to be a frontrunner for the position of the next Fed vice chair for supervision, taking over from Michael Barr, who has announced his intention to step down from the role while remaining as a Fed governor. In her remarks, Bowman stressed the importance of increasing transparency within Fed bank regulators. She asserted that a methodical, transparent, and fact-based strategy towards achieving statutory goals helps demonstrate the Fed’s focus on fulfilling its policy objectives while avoiding distractions posed by political considerations.

“Banks and regulators need to be an adversarial system, but can share the goal of a safe and sound banking system,” she concluded, reinforcing the need for a well-balanced regulatory environment.

Conclusion

The discussions led by Bowman and Schmid reveal a growing complexity within the Federal Reserve regarding interest rate policies. While recent cuts have aimed to achieve a neutral rate, concerns linger about future economic conditions and potential inflationary pressures. As they navigate these challenges, the Fed faces an uphill task in balancing the goals of monetary policy with the realities of a dynamic economic landscape.