If it’s possible for a central bank to cut interest rates and still be hawkish, the Fed accomplished it this week.
At his post-meeting news conference on Wednesday, Fed Chairman Jerome Powell hit markets with an unexpected broadside, insisting that a rate cut in December was far from a done deal. The reaction was swift, with crypto and US stocks falling on Wednesday afternoon and throughout Thursday.
There was also a vote to lower interest rates. A cute group, members of the FOMC typically vote unanimously on policy. However, Wednesday’s decision contained a dissent from Kansas City Fed President Jeff Schmid, who voted to keep policy steady. (There was also a dissent from Fed Governor Stephen Miran, who voted to cut interest rates by 50 basis points instead of 25. A recent appointee of President Trump to the Fed, Miran’s dissent was no surprise as he had done the same at the Fed’s previous meeting).
Inflation is still too high
In a short essay Friday explaining his vote not to cut rates, Schmid questioned the Fed’s need to ease, noting stocks at all-time highs, tight corporate bond spreads and high levels of high-yield bond issuance.
Inflation, he recalled, has stayed above the Fed’s 2% target for years and has stopped falling. “I take some comfort in the fact that most measures of inflation expectations have not gone up,” he said.
But what about worsening labor market conditions? Schmid suggested there’s not much the Fed can do about it, blaming “structural changes in technology and demographics.”
The markets are moving
Amid a decent bounce after yesterday’s tantrum, markets pulled back just a bit on Friday morning in response to Schmid’s comments, with bitcoin falling back below $110,000 and Nasdaq futures now higher by just 1.3% versus 1.7% earlier.
Interest rate traders are now pricing in just a 66% chance of a rate cut at the Fed’s December meeting, up from 73% yesterday and almost 95% before Powell and Schmid’s surprise on Wednesday.
