The Marriner S. Eccles Federal Reserve Board's building in Washington, D.C. The Fed lowered its policy rate by quarter of a percentage point on Wednesday.Sarah Silbiger/Reuters
Two regional Federal Reserve bank presidents on Friday aired their disagreement with the U.S. central bank’s decision to cut interest rates this week, saying the labour market doesn’t need the support and inflation is too high to warrant such a move.
The strikingly frank remarks – from Dallas Fed President Lorie Logan and Kansas City Fed President Jeffrey Schmid – underscore discomfort within the central bank over the direction of policy and suggest a rising bar for another rate cut at its Dec. 9-10 meeting, unless something changes dramatically in the economy.
“I did not see a need to cut rates this week,” Logan told a Dallas Fed banking conference. “And I’d find it difficult to cut rates again in December unless there is clear evidence that inflation will fall faster than expected or that the labour market will cool more rapidly.”
It’s quite rare for a Fed policy maker to say so clearly and so far in advance of a rate-setting meeting what their rate-path preferences are.
On Wednesday, after the central bank’s policy-setting committee voted 10-2 to lower its benchmark interest rate to the 3.75 to 4.00 percent range, Fed Chair Jerome Powell delivered his own unusually clear warning to markets: a December rate cut, he said, was “not a foregone conclusion, far from it.”
Logan’s remarks on Friday help show why.
“The risks to the labour market do lie mainly to the downside,” Logan said, nodding to the reason that Powell gave for this week’s rate cut. She added that she has a close eye on recent layoff announcements and noted that a sudden drop in the stock market and a longer-than-expected government shutdown could pose risks to spending and economic activity.
But “the remaining risks to employment are ones we can monitor closely and respond to if they are becoming more likely to materialize, not ones that currently warrant further pre-emptive action,” Logan said.
She added that inflation is too high and too slow to return to the Fed’s 2-per-cent target.
Logan is not a policy-voting member this year.
Dallas Federal Reserve Bank President Lorie Logan speaks with students at the University of Texas on Oct. 2. She says risks to the U.S. labour market lie largely to the downside.Ann Saphir/Reuters
Schmid, who does have a vote on the policy-setting committee this year and dissented on this week’s move, explained on Friday in a written release that he, like Logan, feels the labour market is largely in balance.
Any weakness, he said, is “more likely than not” due to structural changes in technology and demographics rather than slowing underlying demand.
Judging from healthy consumer spending and business investment, the economy still has momentum, he said.
“I do not think a 25-basis-point reduction in the policy rate will do much to address stress in the labour market,” Schmid said.
Opinion: Why the Fed may pause in December: the cuts don’t work
A cut, however, “could have a longer-lasting effect on inflation if the Fed’s commitment to its 2-per-cent inflation target comes into question,” he said. Fed Governor Stephen Miran also dissented this week, but in favour of a larger half-percentage-point cut.
Financial markets pared expectations on a rate cut in December after Powell signalled it could be in doubt, but are still betting two-to-one the central bank will cut rates by a quarter of a percentage point at its final meeting of the year.
Even with the U.S. government shutdown and the lack of official economic data creating uncertainty about current conditions – one reason Powell gave for a possible pause in December – Logan said she feels she has visibility into the state of the economy.