The Fed faces deep divides at a fraught moment
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Illustration: Brendan Lynch/Axios
This is an extraordinarily delicate moment for America's central bank, as a seemingly routine decision — whether to cut interest rates next month — is exposing deep divides and a moment of flux in how the Federal Reserve operates.
The big picture: The immediate question is this: Should the Fed's policy committee cut rates for a third straight meeting in December to guard against further worsening of the job market, as a narrow majority of officials anticipated in September? Or is elevated inflation a more urgent concern?
- If only it were so simple.
- A constellation of events makes this a fraught moment — quite possibly an inflection point in American central banking history.
State of play: Chair Jerome Powell has been a skilled manager of the Fed's sometimes fractious policy committee, guiding it toward consensus. But as his time leading the central bank winds down — his term is up in May — it looks plausible there will be more open dissent next month than seen in decades.
- If the Fed opts to leave rates unchanged, the three Trump-appointed governors — two of whom are finalists to succeed Powell — could dissent. There have not been three dissenting Fed governors (of a seven-person board) since 1963.
- If the Fed opts to cut rates, there will be significant opposition, especially among the 12 reserve bank presidents, who rotate formal voting spots.
Catch up quick: In just the last 48 hours, presidents of the banks in Boston (Susan Collins), Minneapolis (Neel Kashkari), Kansas City (Jeff Schmid), Cleveland (Beth Hammack), and St. Louis (Alberto Musalem) have expressed rate cut skepticism.
- The absence of government economic data due to the shutdown means that there probably won't be any definitive releases before the meeting that tilt the consensus one way or the other.
Zoom out: Policy disagreements happen, and a couple of dissents aren't the end of the world. But it's impossible to separate the fractious debate over policy right now from the broader environment of uncertainty about the Fed's future.
- President Trump is weighing who will be its next leader, with internal and external candidates in the mix. He wants lower rates, yesterday.
- Trump is attempting to fire governor Lisa Cook, with the Supreme Court hearing a case over whether he can in January.
- All 12 reserve bank presidents' terms are up at the end of February. Their reappointment must be approved by a Washington-based Board of Governors that currently has three Trump appointees. (One reserve bank leader, Atlanta Fed president Raphael Bostic, said this week he is stepping down.)
- Already, the tone and frequency of Fed communications has tilted in a more Trump-like direction, with officials publicly hashing out arguments. Traditionally, governors rarely gave TV interviews. In the last couple of months, they've become routine.
No matter what the committee decides to do next month, the optics could be messy — and raise the prospect that a post-Powell Fed will be driven less by technocratic debate and consensus building and more by raw vote-counting power.
- Trump allies have explicitly argued for such a regime, with more open disagreement and debate.
- For example, Stephen Miran, now a Fed governor, wrote last year recommending changes that would "reduce pernicious groupthink and increase the frequency of dissent."
What they're saying: "We think much would be lost if the old chairman-led collective technocratic deliberation process to reach a broadly accepted central view breaks, and the Fed starts making decisions on 9-3, 8-4, or even 7-5 votes," Evercore ISI's Krishna Guha wrote in a note.
- But, he added, "how damaging a shift to raw majoritarian policy would be would depend on the quality of leadership and decision-making under the next chair and the caliber of other new appointees."
The bottom line: Maybe Powell once again finds a way to guide the FOMC toward some fragile consensus in December.
- But for those of us who have followed the central bank for many years, there is an inescapable feeling that the basics of how things work are shifting beneath our feet.
