Following the Federal Reserve's announcement of a 25 basis point interest rate cut, which was in line with expectations, a striking assessment emerged indicating a deepening of disagreements within the institution.
Nick Timiraos, recognized for his insightful interpretations of the Fed's internal communications, noted that despite the third consecutive interest rate cut, there was an unusual division among decision-makers.
According to Timiraos, Fed officials are seriously divided on the priority order between inflation and the labor market. Consequently, strong signals have been given that the committee's willingness to continue with interest rate cuts is quite low. As recent statements have shown, the division is so deep that how the final decision will take shape may largely depend on the direction of Chairman Jerome Powell.
Powell's Approaching Term End and the Fed's Dilemma
Powell's term as Fed Chair ends next May, leaving him with only three more interest rate-setting meetings. With both strong price pressures and a cooling labor market present, the Fed is confronting a dilemma it hasn't encountered in decades. Timiraos observed that this situation bears a resemblance to the “stagflation” period of the 1970s, recalling how the inconsistent policies of that era contributed to persistent high inflation.
Expert Warning on Neutral Interest Rates
UBS Chief US Economist Jonathan Pingle also issued an important warning regarding the current situation. Pingle stated, "As interest rates approach the neutral level, you lose the support of more committee members with each cut. Therefore, the data needs to more strongly convince members that cuts should continue."