Most of the committee members judged that further downward adjustments to the target range for the federal funds rate would likely be appropriate over time, but several indicated they didn’t necessarily view another 25 basis point reduction in December as likely to be appropriate.
The sudden emergence of divergences in opinions within the Fed relates primarily to the uncertain outlook for the two key streams of data the Fed relies on in setting rates and meeting its dual mandate of maximising both employment and price stability.
Jerome Powell and Lisa Cook in Trump’s crosshairs.Credit: AP
The US unemployment rate has been edging up as demand for new hirings has slumped, although Trump’s controversial purge of undocumented immigrants means the pool of labour required to keep that rate in check has also been shrinking and therefore the impact on the unemployment rate has been muted.
The inflation rate has been edging up, with the impact of Trump’s tariffs starting to show up as the bloated inventories of companies that raced to get in ahead of their introduction (which, for most of the tariffs, didn’t occur until August) run down.
With its two key data points trending in different directions – economists are referring to the economic conditions as “stagflation-lite” – the Fed’s normal consensus is being split between those who prioritise either jobs or inflation.
After the October meeting, Powell likened the mixed economic signals to “driving in the fog” and said it wasn’t a foregone conclusion that there’d be another rate cut in December. Futures markets that had been pricing in a more than 90 per cent probability of a December cut now assess the odds of a cut as less than 40 per cent.
The fog has deepened since Powell made that comment. The record-setting 43-day shutdown of the US government that ended last week meant that the Bureau of Labor Statistics didn’t collect economic data last month.
The White House said this week that what data that has been collected will be rolled into the November jobs report and published on December 16 – a week after the next meeting of the Fed’s rate-setting body, the Federal Open Market Committee. It is also unlikely that there will be any inflation data for October available before the meeting.
The Fed, which prides itself in being data-driven, will therefore be flying blind at that meeting, which makes it less likely that it will cut rates again.
That will infuriate Trump. On Wednesday the president said, referring to Powell, that he would love to fire him for not lowering rates as much as Trump wants.
Stephen Miran has made his presence felt after being handpicked by Donald Trump to fill a Fed vacancy. Credit: AP
“I’ll be honest, I’d love to fire his ass. He should be fired. Guy’s grossly incompetent,” Trump said, while joking that he’d also fire his Treasury Secretary, Scott Bessent, if he doesn’t “get it fixed”.
Earlier this year, the White House showed a note Trump had sent to Powell in which he compared the Fed’s target range for the federal funds rate, now 3.75 per cent to 4 per cent, to the policy rates of more than 30 other central banks. In the note, Trump said he thought the US rate should be not more than 1.75 per cent.
Powell’s term as chair – but not necessarily as a governor – ends next May, and Bessent has been interviewing candidates to succeed him. While the shortlist has five candidates, Trump has said, without disclosing their identity, that he believes he already knows who his pick will be.
The administration has been looking at ways in which Trump can gain control of the Fed. It appointed Miran (who retained his job at the White House) to fill a casual vacancy that wouldn’t otherwise have been available until February. That seat could be used to bring in Trump’s candidate for chair, if they aren’t already on the Fed’s board.
Unless Powell resigns as a governor, or Trump succeeds in firing another governor, Lisa Cook – where the attempt to use mortgage fraud as a pretext for sacking her doesn’t appear to be going smoothly – his appointee will, with the two existing Trump-appointed governors, Bowman and Waller, be a minority on the seven-member Fed board and the 12-member Open Market Committee. (The committee includes five regional Fed bank presidents).
The consensus-driven decision-making that has characterised the Powell Fed is already breaking down. It is even more likely that, with a Trump chair appointed because they have committed to doing what Trump wants – he’s not going to appoint anyone who tells him otherwise – that emerging streak of Fed members’ independence will widen.
That’s a healthy development. It’s fine to want harmony and consensus within a board, but ideas and opinions do need to be debated and convictions shouldn’t be abandoned just to achieve a consensus.
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“Groupthink” can lead to poor decision-making, and an alignment of members’ views with a Trump-minded chair could be disastrous for the US economy, although the “bond vigilantes” would inevitably weigh in if they thought rate settings were out of kilter with the inflation rate – and there would be an exodus of capital from the US if the Fed’s independence was seen to be compromised.
It would, however, be ironic that, in forcing Powell out and replacing him with someone he sees as loyal to him and his views, Trump actually creates an even more independent Fed than the one he has consistently lambasted and schemed to gain control over throughout both his terms in the White House.
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