Fed Officials Divided on Interest Rates
The government shutdown has left Fed officials without key data, making it challenging for them to decide how much to cut interest rates. Some officials, like Stephen Miran, are more concerned about the job market, while others, like Jeff Schmid, are worried about inflation.
The Neutral Interest Rate
Miran, the newest Fed governor, believes that the neutral interest rate has decreased over the past year. He thinks that the current interest rates are too restrictive and pose risks to the economy. Miran wants to reach a neutral level on interest rates faster than his colleagues, which would neither boost nor slow economic growth.
Inflation Concerns
Schmid, on the other hand, argues that the current interest rates are slightly restrictive, which is the right place to be. He believes that inflation is still too high and that monetary policy should lean against demand growth to allow supply to catch up and relieve price pressures. Schmid is concerned that aggressively boosting demand could raise the risk of an outsized increase in prices.
The Impact of Immigration and Tariffs
Miran favors lower interest rates because immigration is declining rapidly, and he expects tariffs to lower the deficit. He doesn’t think that tariffs will lead to inflation, although he admits that it’s possible that the effects haven’t been seen yet. Schmid, however, worries that tariff-induced inflation could become a problem.
Durable Goods and Services
Schmid notes that the prices of durable goods, such as washing machines and refrigerators, are increasing. He also points out that the prices of services, like haircuts and electricity, are rising faster than the Fed’s 2% target. Schmid is concerned that price increases are becoming more widespread, with almost 80% of consumption categories reporting price increases.
The Government Shutdown
The government shutdown has made it difficult for Fed officials to make informed decisions about interest rates. Miran says that private sector data is not a sufficient replacement for government data, while Schmid is relying on alternative data sources, including surveys conducted by the Kansas City Fed.
Stagflationary Signals
Minneapolis Fed president Neel Kashkari is concerned about both inflation and the labor market. He says that economic data is sending stagflationary signals, with the job market slowing and inflation sticking around 3%. Kashkari wonders whether tariff inflation will be short-lived or sticky.
Conclusion
The Fed officials are divided on how much to cut interest rates, with some worried about inflation and others concerned about the job market. The government shutdown has made it challenging for them to make informed decisions, and they are relying on alternative data sources. As the economy continues to evolve, the Fed will need to balance its dual mandate of maintaining price stability and maximizing employment. The next rate decision will be made on October 28-29, and it will be crucial in determining the direction of the economy.
