The Full Monty, Fed version, was served up last week, as the members of its policy-making Federal Open Market Committee (FOMC) gathered to bare their views on the state of the US economy and the direction of monetary policy. Voting were all seven governors of the Federal Reserve Board, the president of the Federal Reserve Bank of New York always, and the presidents of four other regional Federal Reserve banks that are rotated off after one year. Seven other regional president attend to kibbitz, making the meeting a formidable gathering of sources of economic intelligence from around the country.
The FOMC Decides To Cut
The median view of these worthies is that the economy is growing faster, the unemployment rate is lower and inflation is hotter than they thought only a short time ago. Those beliefs notwithstanding, they plan to cut rates three times this year, preferred over two cuts by one vote.
Whether they regretted last week’s baring of their forecasting talents when new data appeared as they began a long weekend after a trying week, we do not know. Sales of existing homes, which have been in the doldrums, jumped a surprising 9.5 per cent in February, the highest level in a year, and prices of those homes rose 5.7 per cent. The S&P index of US manufacturing activity, a sector that is supposed to be slowed by high interest rates, hit a 21-month high, and the Philadelphia Fed manufacturing index came in stronger than expected. The Conference Board’s Index of leading economic indicators increased in February after a streak of 23 negative months. Nothing like a burst of economically robust “incoming data” on which the Fed professes to be “dependent” to set the stage for serial rate cuts.
So It’s All Politics Then, As Trump Charges?
It would be wrong to assume that this means the only reason the Fed is considering rate cuts is that it is an election year, and Jay Powell, whose term as chairman ends in May 2026, will seek to hang on to the chairmanship – he remains a governor until January 2028 — by stimulating the economy with Presidential-pleasing rate cuts.
Two reasons he won’t do that. First, his reputation was in tatters after “transitory” inflation proved anything but, and he has rescued it from the scrap heap of future doctoral dissertations by raising rates vigorously. Second, he has no reason to cater to either candidate. Both will want to see him gone. Trump, when President, tweeted, “My only question is,” tweeted, “Who is our bigger enemy, Jay Powell or Chairman Xi?”
Powell’s prospects are no brighter should Biden win re-election. Biden will be in thrall to the Bernie Sanders-Elizabeth Warren-Congressional Progressive Caucus left-wing of his party that will demand a chair who will concentrate on solving inequality, fighting climate change, and more tightly regulating banks, with the health of the economy a subsidiary consideration. Available candidates include Lael Brainard, who resigned as vice chair of the Fed to become director of Biden’s National Economic Council
It is the politicians’ unremitting preference for low interest rates, inflation be damned, that has led to the creation of central banks to the consternation of politicians whose version of Powell’s “data-driven” is to check the latest polls. History suggests that central bankers are far from infallible, but also that politicians left to their own devices will yield to the temptation to pander to voters with low nominal rates and inflation that permits them to repay debts in depreciated dollars.
The FOMC Details Its Median Judgement
That is for another day, perhaps. Now we have the median view of the FOMC members. At year-end the economy will be growing at a 2.1 per cent rate, rather than the 1.4 per cent rate expected a short time ago. The unemployment rate will be 4.0 per cent, a tick down from the earlier 4.1 per cent median expectation. When Father Time picks up his scythe and shuffles off the stage, inflation as the Fed measures it is expected be running at 2.6 per cent, rather than 2.4 per cent.
Powell Explains The Gap Between Data and Policy
Here is how Powell bridges the gap between the “hot” economic evidence and the FOMC plan to cut interest rates while nevertheless achieving the Fed’s goal of a long-term, two per cent inflation rate by 2026. He concedes that the surprisingly high inflation figures for January and February cannot be ignored. But they don’t change “the overall story of inflation moving down gradually to two per cent on a sometime bumpy road.”
More important, above-trend economic growth and a strong labor market are not inconsistent with lower inflation. America’s “impressive economy” has kept unemployment below 4 per cent for 27 months in which inflation as measured by the CPI was cut from around 9 to 3 per cent . In part that is due to supply-side developments. The participation rate of 25-54 year-old workers has risen, as has immigration, lowering pressure on employers to offer higher wages to attract already-employed workers. Powell might also have in mind a recent sign that productivity lives, and lurid tales of AI making much human labor so unnecessary that upward pressure on wages disappears. That of course, would only be the case if the FOMC forecast of continued low unemployment proves correct. But, hey, “a foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.” Surely, no FOMC members meet Emerson’s criteria.
Beware Of A President Bearing Gifts
When told that the King of Thailand was making a celebratory gift of an elephant to him on the establishment of the state of Israel, its President, Dr. Chaim Weizman, advised a polite turndown. His staff later reported they were told, “Never accept a gift that eats.” Whether or not that is an accurate accounting, it surely is the case that no one should accept a gift that bites.
When Powell does cede the spotlight to a more woke chairman, he cannot expect a letter of gratitude with a White House return address. Washington wags like to say that if you want gratitude get a dog. He may already have such comfort, but in any event should not accept Biden’s German shepherd, Commander, as a going-away present if it is offered. The Secret Service reports Commander has bitten its agents at least 24 times.