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Key Takeaways
- Federal Reserve officials shared opposing viewpoints as to whether the Fed should cut its benchmark interest rate in December.
- Raphael Bostic argued inflation is a greater threat than unemployment, and said the Fed should keep rates higher longer to combat price increases.
- Stephen Miran predicted high inflation would subside as a result of falling housing costs, so the Fed should cut rates.
Fed officials are divided on whether to cut its influential interest rate in December, as illustrated by policymaker remarks this week.
Two members of the Federal Open Market Committee spoke publicly on Wednesday, but they each made very different cases. Atlanta Fed President Raphael Bostic argued for keeping rates steady, while Governor Stephen Miran contended that the federal funds rate is too high and should be cut quickly and steeply.
It’s no wonder that financial markets are uncertain about the Fed’s next move at its December meeting. Traders are currently pricing in a 60% chance the Fed will cut its benchmark interest rate by a quarter of a percentage point next month, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
What This Means For The Economy
The debate among Fed officials underscores the U.S. economy’s precarious position as it faces both the risk of rising unemployment and high inflation at the same time, an environment known as “stagflation.”
The Fed is torn between the two halves of its dual mandate to keep inflation low and employment high. Typically, when inflation is high, the central bank raises the fed funds rate, which increases borrowing costs on loans and slows the economy to bring supply and demand into balance. When the job market is struggling, the Fed can lower interest rates to make loans more affordable and encourage hiring.
But right now, both data points are trending in the wrong direction.
“I believe that risks to both of the mandated objectives make this the most challenging environment since I became a central banker in 2017,” Bostic said at the Economics Club of Georgia in Atlanta.
The Fed cut interest rates twice at its last two meetings, but Federal Reserve Chair Jerome Powell went out of his way last month to say a third cut is not guaranteed. Whether it happens or not hinges on how Fed policymakers balance the threat of inflation against a surge in unemployment.
The Case To Worry About Inflation
Bostic said he favored holding rates steady, although it was an “extremely close call.”
He also noted that inflation has been higher than the Fed’s 2% target for almost five years, when pandemic-era supply shortages drove a harrowing bout of price increases. And by many measures, inflation has inched higher in recent months, at least partly because President Donald Trump’s tariffs are pushing up prices.
“I see little to suggest that price pressures will dissipate before mid- to late 2026, at the earliest,” Bostic said.
Businesses plan to increase prices further in the coming months, according to surveys conducted by the Atlanta Fed. That’s a major reason why Bostic said he is more concerned about inflation, even though the ongoing government shutdown has delayed much of the price data the Fed normally uses to make such decisions.
Slowing Home-Price increases Could Ease Inflation
Bostic’s colleague, Miran, offered the opposite view on Wednesday in a fireside chat at Cambridge University in Britain. High interest rates are not necessary to combat inflation and, in fact, risk harming the job market, he said.
In Miran’s estimation, inflation is going to turn around soon. As evidence, Miran pointed to the fact that housing cost increases, which are by far the most important component of inflation indexes, are slowing down.
And since those prices take about a year to filter through into inflation measures such as the Consumer Price Index, there is already a lot of disinflation in the pipeline. Therefore, he said, the Fed should be cutting rates aggressively, and the current interest rates are fighting yesterday’s inflation battle.
“I think Fed policy is too restrictive,” he said. “I think that policy is being made on a backward-looking basis.”
Waiting For Fresh Data
With the government shutdown expected to end Wednesday, the Federal Reserve may finally get to see some government data that could sway its opinion. The federal government shutdown delayed key reports on the job market and inflation, but some of them could be released before the Fed’s next meeting.
Economists at Goldman Sachs predicted the Bureau of Labor Statistics would release a long-awaited report on the September job market within a week of reopening.
Reports for October are more problematic and may never be released, since the government was shut down when the BLS and other agencies were supposed to be collecting that data. And reports for November could be delayed until after the FOMC’s meeting Dec. 9 and 10, according to the Goldman analysis.
