A recent analysis by Nick Timiraos points to growing disagreements within the Fed and a critical juncture in monetary policy communication. According to Timiraos, known as the “Fed’s spokesman,” the two-day Federal Open Market Committee (FOMC) meeting will conclude on Wednesday, and this will be Jerome Powell’s last meeting as chairman.
The general expectation in the markets is that the Fed will keep its policy interest rate stable in the 3.5%–3.75% range. However, the main debate focuses on whether officials will maintain their rhetoric regarding interest rate cuts. The statement in the decision text that “the next policy step is more likely to be an interest rate cut than an increase” is seen as crucial for the direction of the markets.
Rising geopolitical tensions on a global scale are also making the Fed’s job more difficult. The energy shock and supply disruptions stemming from the war with Iran are bringing stagflation risks back to the forefront, while the de facto blockage in the Strait of Hormuz and the sharp rise in jet fuel prices are negatively impacting the inflation outlook. Fed officials predict that it could take at least a year for inflation to return to the 2% target.
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The US economy has faced four major supply shocks in the last five years: the post-pandemic reopening, the Russia-Ukraine war, trade tensions, and the recent crisis in the Middle East. These developments have increased uncertainty in monetary policy and deepened disagreements within the Fed. It is reported that Christopher Waller, a member of the Fed Board of Governors who previously supported interest rate cuts due to concerns about the labor market, has adopted a more cautious stance this month regarding inflation risks.
According to Timiraos’ analysis, the biggest point of contention within the Fed is whether or not to change the official policy statement. Some officials advocate removing the current “tendency to cut rates” phrase. This step would equalize the probabilities of rate cuts and increases, and would be perceived by markets as a hawkish signal. However, the majority within the committee believes that such a change could unnecessarily tighten financial conditions.
Therefore, although it is almost certain that the Fed will keep interest rates unchanged at this meeting, the tone of the message and the forward guidance will be decisive in pricing in global markets.
*This is not investment advice.
