On the surface, it appears to be a dispute between hawks and doves, but the deeper issue lies in whether this policy disagreement is a prelude to the contest for the next Federal Reserve Chair.
As the fog of economic uncertainty thickens, divisions and dissent within the Federal Reserve's 19-member monetary policy-setting committee are deepening, presenting Chairman Powell with the ultimate test of his consensus-building abilities.
The Fed’s decision to cut rates last week was not surprising in itself, but the meeting was historic nonetheless. The vote to cut rates by 25 basis points, which passed 10-2, marked only the third time since 1990 that voting members simultaneously leaned toward both tightening and easing monetary policy.
Milan, a governor appointed by Trump, voted in favor of a 50-basis-point rate cut, while Kansas City Fed President Schmid opted to keep rates unchanged.
These fractures were highlighted during Powell's press conference after the meeting. He told reporters that officials held “sharply differing views” on how to proceed, suggesting that December's easing is far from the “sure bet” markets had anticipated. In fact, the December decision may come down to a coin toss between another 25-basis-point cut or holding steady.
All of this unfolds at a challenging moment. Investors are grappling not only with an economic data drought caused by the U.S. government shutdown but also with existing indicators showing a weakening labor market and stubbornly persistent inflation. Meanwhile, the Fed is under severe political pressure, as the Trump administration attacks the central bank’s independence while preparing to nominate Powell’s successor next year.
For markets—particularly those already priced for perfection—this amounts to a perfect storm they could do without.
Hawks vs Doves
Within a 19-member committee comprising Fed governors and presidents of 11 regional reserve banks, a broad spectrum of opinions is to be expected.
Broadly speaking, the current divide between “doves” and “hawks” appears to roughly pit the governors against the regional Fed presidents. Both camps have moderates, but the governors tend to favor easier policies, while the regional presidents lean toward caution about further rate cuts.
Since the Federal Reserve's meeting last week, Dallas Fed President Logan, Kansas City Fed President Schmid, Cleveland Fed President Harmaek, and Chicago Fed President Goolsbee have all expressed concerns about interest rate cuts.
Meanwhile, governors Mullan, Waller, and Bowman publicly supported last week’s decision to cut rates and favored further policy easing. Both Waller and Bowman are on the shortlist of candidates to replace Powell as Treasury Secretary Bessent takes over; Powell’s term as chairman will end in May next year.
"Noisy and disorderly"
As recent policy meetings have demonstrated, Powell’s leadership and ability to build consensus will face a severe test in this environment. Governors Waller and Bowman dissented during the July vote, favoring a rate cut, and last month saw a historic split with opposing votes from both sides.
Admittedly, regional Fed presidents without voting rights are demonstrating their influence, but the ultimate impact remains to be seen. As Tim Duy, chief U.S. economist at SGH Macro Advisors, pointed out, “Power emanates from the Board.”
"It is more difficult for Powell to reach a consensus in this environment," Duy said, adding that Powell has been "exceptionally adept" at doing so during his tenure as chairman.
If this policy polarization intensifies, many investors currently operating in the market will find themselves in unfamiliar territory, having grown accustomed to the Federal Reserve’s well-communicated, consensus-driven policies.
James Egelhof, chief U.S. economist at BNP Paribas, believes that the "high level of consensus" investors have become accustomed to may prove "elusive" in the coming months.
Egelhof still expects the Federal Reserve to cut rates further, including in December, but he also believes we may witness a "noisy and disorderly" process, resulting in a path that is "bumpier and less predictable" than what investors typically encounter.
"Polarization breeds uncertainty," he said.
Of course, greater policy uncertainty tends to fuel market volatility and an increase in risk-averse sentiment, which theoretically should be reflected in a rise in risk premiums or the widening of spreads. However, this has not yet occurred. But if the newly emerging divisions within the Federal Open Market Committee (FOMC) continue to expand, we may see this happen.
Editor/KOKO