American central bankers are caught in a set of conflicting mandates. The Fed’s primary mandates are stable prices and full employment. There’s a third, less discussed mandate for maintaining moderate long-term interest rates, which the central bank and Congress were reminded of during recent testimony by Stephen Miran before the Senate Banking Committee.
For the moment, Federal Reserve Chairman Jerome Powell has his hands full with his efforts to maintain balance between the two better known pieces of the Fed’s mandate, stable prices and full employment. With only one real lever to pull, interest rates, he can favor one mandate or the other.
Since raising the target Fed funds rate to 5.5% to fight Bidenflation, Powell & Co. have reduced the rate to 4% to alleviate what appears to be a softening labor market. Despite the market having priced in another 25 basis point cut in December, Powell is signaling that he’s not so sure. The Wall Street Journal’s editorial board writes:
The cross-cutting data on the Fed’s two mandates—price stability and full employment—argues for caution from policy makers. Mr. Powell claims that’s what he’s delivering by warning investors off any hopes for another rate cut in December. “What do you do if you’re driving in a fog?” he asked during his press conference. “You slow down.”
This FOMC meeting marks the first time in this easing cycle that any meeting participant has voted against rate cutting, as Kansas Fed President Jeffrey R. Schmid preferred holding rates steady. Previous disagreements centered on the pace of reductions.
But Mr. Schmid was a lone vote for caution. Whatever Mr. Powell says about slowing down, his actions and financial markets say otherwise. Equity valuations remain near record highs and credit spreads are unusually tight. Despite 50 points of short-term rate cuts since September, long rates have barely moved and they rose Wednesday. Financial conditions aren’t restrictive.
Action Line: Savers would be happy to see the Fed slow or even stop its rate cuts, while desperate borrowers are looking for the low interest rates seen only recently. Powell is most likely looking to maintain stability until his term runs out in May of next year. Only time will tell. Click here to subscribe to my free monthly Survive & Thrive letter.
