Fed Rate Cut Divides Committee, Signals Political Influence - Episode Hero Image

Fed Rate Cut Divides Committee, Signals Political Influence

Bloomberg Surveillance · · Listen to Original Episode →
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TL;DR

  • The Fed's decision to lower rates by 25 basis points, despite investor expectations, was marked by three dissents, signaling a divided committee and potential future political influence on monetary policy.
  • The Fed's revised growth forecasts for 2026 to 2.3% and unemployment forecast to fall to 4.4% next year, while inflation is seen slowing, raises questions about the necessity of the rate cut given the projected economic trajectory.
  • The Fed's acknowledgment of ample reserve balances and planned purchases of shorter-term Treasuries indicate a structural issue with government debt and potential fiscal dominance, where monetary policy may be influenced by fiscal needs.
  • The dissent of Austin Goolsbee, a technology-focused economist, suggests a potential disconnect between traditional economic models and the impact of AI on productivity, raising questions about future economic growth and policy responses.
  • The market's positive reaction to the rate cut, with stocks rising and bond yields falling, suggests a collective relief that the decision was not more hawkish, indicating a desire for continued accommodative policy.
  • Concerns about the Fed's independence are amplified by the potential for a politically appointed successor to prioritize lower rates, creating a risk of monetary policy being driven by political agendas rather than economic data.
  • The Fed's struggle to reach its 2% inflation target for several years, coupled with ongoing fiscal stimulus, suggests a prolonged period of elevated prices and potential affordability issues for consumers, despite disinflationary trends.

Deep Dive

The Federal Reserve's recent decision to lower its benchmark rate by 25 basis points, while anticipated, was marked by an unusual level of internal division, with three dissents from the Federal Open Market Committee (FOMC). This divergence signals a potential shift in the Fed's operational independence and introduces uncertainty regarding future policy, particularly as economic forecasts suggest moderate growth and slowing inflation.

The core of the Fed's decision was a 25 basis point rate cut, bringing the benchmark rate down as investors expected. However, the presence of three dissents, including two members advocating for no cut at all, is a significant departure from recent practice and highlights a more fractured committee. Furthermore, the dot plot, which projects future rate expectations, indicates that a majority of committee members favor only one rate cut next year, with some even suggesting rates might need to increase. This contrasts with market expectations that had priced in more aggressive rate reductions. The Fed's statement also reintroduced language from a year ago concerning the "extent and timing of additional adjustments," suggesting a more cautious approach to future policy changes. Economically, the Fed revised its GDP growth forecast upward for 2026 to 2.3%, while unemployment is expected to remain at 4.4% next year. Inflation, though elevated, is projected to slow markedly, with core PCE falling to 2.5% next year, but the target 2% inflation rate is not expected to be reached until 2028. A notable shift also occurred in the Fed's assessment of reserve balances, now described as "ample," leading to plans for reserve management operations involving short-term Treasury purchases to maintain this level.

The implications of this fractured Fed decision extend beyond immediate market reactions. The dissents, particularly from academic economists, raise questions about the influence of technological advancements like AI on productivity and GDP forecasts, suggesting that the Fed may be underestimating the potential for faster economic growth without igniting inflation. This also feeds into broader concerns about fiscal dominance, where the government's large deficits and spending may be forcing the Fed to manage liquidity in ways that could be perceived as monetizing debt, potentially encouraging further fiscal expansion. A key second-order effect is the potential erosion of the Fed's political independence. With a new Fed chair expected, the increased dissent and the perceived influence of political agendas on monetary policy could lead to a regime of persistently low rates driven by political rather than economic considerations. This politicization risks undermining the Fed's credibility and its ability to effectively manage inflation and economic stability. Moreover, the persistence of high prices, even as inflation moderates, continues to impact affordability for consumers, creating a political tension that the Fed must navigate. The market's initial relief suggests it views the decision as manageable, but the underlying divisions and the looming political backdrop create a complex and uncertain path forward for monetary policy.

Action Items

  • Audit Fed statement language: Identify 3-5 instances of ambiguity regarding future rate policy and assess their potential impact on market expectations.
  • Analyze dissent motivations: For the 3 dissenting FOMC members, research their stated reasons and evaluate the potential systemic implications of their differing economic outlooks.
  • Track fiscal stimulus impact: Monitor the flow and effect of government spending initiatives (e.g., tax refunds) on inflation and consumer demand over the next 2-3 quarters.
  • Evaluate AI productivity claims: For 3-5 key industries, assess the tangible evidence of AI-driven productivity gains and their contribution to GDP growth forecasts.
  • Measure reserve balance impact: Quantify the effect of the Fed's reserve management operations on short-term funding markets and assess potential future liquidity risks.

Related Episodes

Key Quotes

"The most divided Fed since before the pandemic voted to lower the benchmark rate by 25 basis points as investors expected but there were three dissents for the first time since 2019 and on the dot plot a total of six members of the committee suggested they were not in favor of lowering rates."

This quote highlights the unusual level of disagreement within the Federal Reserve's decision-making body. The presence of three dissents, the highest number since 2019, and six members signaling opposition to rate cuts indicates a significant divergence of opinion on monetary policy. This division suggests underlying concerns or differing economic outlooks among committee members.

"There's also a hawkish line in the statement in considering the extent and timing of additional adjustments to the target range bringing back language from a year ago when they paused their first round of rate cuts."

The author points out the inclusion of specific language in the Fed's statement that signals a cautious approach to future policy adjustments. This "hawkish line," reminiscent of language used when the Fed previously paused rate cuts, suggests a deliberate effort to signal that further reductions are not guaranteed and will be carefully considered based on evolving economic conditions.

"The committee statement says economic activity has been expanding at a moderate pace and the latest forecasts show a consensus gdp figure of 1.7 for this year but in a big move up they have revised growth forecasts for 2026 to 2.3."

This quote summarizes the Federal Reserve's assessment of economic growth. The author notes that while current economic activity is described as "moderate," the Fed has significantly increased its GDP growth forecast for 2026. This upward revision suggests an expectation of stronger economic performance in the medium term.

"The statement says job gains have slowed this year and the unemployment rate has edged up through September nodding to the government shutdown caused absence of data the statement repeats that more recent indicators are consistent with these developments."

The author extracts the Fed's commentary on the labor market. This passage indicates that job growth has decelerated and the unemployment rate has slightly increased, though the statement acknowledges data limitations due to a government shutdown. The repetition of "consistent with these developments" suggests the Fed is acknowledging these trends without necessarily indicating a drastic shift in policy based on them.

"No surprise Stephen Myron wanted a half point reduction but in something of a surprise Austin Goolsbee joined Jeffrey Schmid in dissenting for no cut at all next year's dot plot suggests just one cut coming seven members want no move however including three who think the rate might go up."

This quote details specific dissents and future rate expectations. The author highlights that while a larger rate cut was anticipated by one member, the surprise came from two members advocating for no cut at all. Furthermore, the author points out that the dot plot indicates a consensus for only one rate cut next year, with some members even considering a rate hike.

"To me the most interesting nuance here is the dissent of the gentleman from Chicago this is brilliant academics out of Milton Yale and the Massachusetts Institute of Technology Austin Goolsby is basically our technology president he's wired into the internet wired into the computers and I'd love to know if his dissent has to do with the vibrancy of AI which leads to a better productivity a better GDP."

The author identifies a particularly noteworthy dissent from Austin Goolsbee, emphasizing his academic background and technological focus. The author speculates that Goolsbee's dissent might be linked to the potential impact of Artificial Intelligence (AI) on productivity and GDP growth, suggesting a forward-looking perspective on technological advancements influencing monetary policy.

Resources

External Resources

Books

  • "The Volcker Rule" by Paul Volcker - Mentioned as a historical precedent for Fed policy.

Articles & Papers

  • "The Fed's Role in the Funding Market" (Source not specified) - Discussed in relation to reserve management and potential fiscal dominance.

People

  • Austin Goolsbee - Mentioned for dissenting on the Fed's decision to lower rates.
  • Bob Michael - Mentioned as a commentator on the Fed's decision and market reactions.
  • Diane Swonk - Mentioned for her insights on productivity, AI, and inflation.
  • Jay Powell - Mentioned as the Fed Chair overseeing the policy decision and press conference.
  • Jim Bianco - Mentioned as a commentator on inflation, Fed policy, and market reactions.
  • Lisa Cook - Mentioned in relation to a Supreme Court case concerning Fed independence.
  • Matt Luzzetti - Mentioned as a commentator from Deutsche Bank on Fed policy and economic outlook.
  • Michael McKee - Mentioned as a reporter covering the Fed's decision and market reactions.
  • Myron - Mentioned as a Fed governor who wanted a half-point rate reduction.
  • Paul Volcker - Mentioned in relation to the "Volcker Rule" and historical Fed policy.
  • Schmid - Mentioned as dissenting for no rate cut.
  • Shigeru Kawa - Mentioned as being present in a discussion about the next Fed regime.
  • Stephen Myron - Mentioned as wanting a half-point rate reduction.
  • Tom Keene - Mentioned as a host of Bloomberg Surveillance.
  • Tom Honig - Mentioned as being present in a discussion about the next Fed regime.
  • Axel Weber - Mentioned as being present in a discussion about the next Fed regime.

Organizations & Institutions

  • Bank of England - Mentioned as an analog for the Bank of England's independence.
  • Bloomberg - Mentioned as the source of the podcast and its journalists/analysts.
  • CVS Caremark - Mentioned in relation to prescription savings.
  • Deutsche Bank - Mentioned as the employer of commentator Matt Luzzetti.
  • Finra - Mentioned as an affiliate of J.P. Morgan Distribution Services Inc. and a member of Public Investing Brokerage Services.
  • Isares - Mentioned in relation to ETFs.
  • J.P. Morgan Asset Management - Mentioned for its active fixed income ETFs.
  • J.P. Morgan Chase & Co. - Mentioned as the parent company of J.P. Morgan Asset Management.
  • J.P. Morgan Distribution Services Inc. - Mentioned as an issuer of communications.
  • KPMG - Mentioned as the employer of commentator Diane Swonk.
  • National Football League (NFL) - Mentioned in the context of sports analytics.
  • New England Patriots - Mentioned as an example team for performance analysis.
  • Public - Mentioned as a platform for building multi-asset portfolios and generated assets.
  • Public Advisors LLC - Mentioned as an SEC registered advisor.
  • Public Investing Inc. - Mentioned as a member of FINRA and SIPC.
  • The Fed (Federal Reserve) - Primary subject of the discussion regarding monetary policy.
  • The Federal Reserve - Primary subject of the discussion regarding monetary policy.
  • The Fed's FOMC (Federal Open Market Committee) - Mentioned in relation to voting and dissents on rate decisions.
  • The Fed's Summary of Economic Projections (SEP) - Mentioned for its GDP and unemployment forecasts.
  • Treasury - Mentioned in relation to bond purchases.
  • U.S. Securities and Exchange Commission (SEC) - Mentioned as the registering body for Public Advisors LLC.

Tools & Software

  • Adobe Acrobat Studio - Mentioned for its AI-powered PDF features.
  • AI (Artificial Intelligence) - Discussed as a driver of potential productivity gains and economic growth.
  • ChatGPT - Mentioned in the context of AI capabilities.

Websites & Online Resources

  • Adobe.com/do-that-with-acrobat - Mentioned as a resource to learn more about Adobe Acrobat Studio.
  • Chase.com/reserve-business - Mentioned as a resource to learn more about Chase Sapphire Reserve for Business.
  • Jp morgan.com/get-active - Mentioned as a resource to learn more about J.P. Morgan's active fixed income ETFs.
  • Mypolicyadvocate.com - Mentioned as a resource for policy transparency.
  • Omnystudio.com/listener - Mentioned for privacy information.
  • Public.com/market - Mentioned as a resource to learn more about Public's offerings and bonus.
  • The Fed's Dot Plot - Mentioned for indicating future rate cut expectations.

Other Resources

  • AI-Powered PDF Spaces - Mentioned as a feature of Adobe Acrobat Studio.
  • Chase Sapphire Reserve for Business - Mentioned as a business credit card with premium benefits.
  • Generated Assets - Mentioned as a feature on Public allowing users to create investable indexes with AI.
  • MyPolicyAdvocate - Mentioned as a platform that explains insurance policies.
  • Repo Market - Discussed in relation to funding market stability and government debt.
  • Reserve Management Purchases - Mentioned as a reason for market movement.
  • T-Bill Purchases - Mentioned as part of the Fed's reserve management operations.
  • Tariffs - Mentioned as a factor contributing to inflation.
  • The One Big Beautiful Bill Act - Mentioned as a potential source of fiscal stimulus.
  • US Public Bond Market - Mentioned in relation to fixed income ETFs.
  • Verizon Business LTE Business Internet - Mentioned as an internet service for small businesses.

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