If it’s possible for a central bank to cut rates and remain hawkish, the U.S. Federal Reserve did it this week.
At his post-meeting press conference on Wednesday, Federal Reserve Chair Jerome Powell hit markets with an unexpected attack, insisting that a rate cut in December was far from a done deal. The reaction was swift: cryptocurrencies and US stocks fell on Wednesday afternoon and throughout Thursday.
They also voted in favor of cutting rates. FOMC members, a friendly group, typically vote unanimously on policies. However, Wednesday’s decision was met with dissent from Kansas City Fed President Jeff Schmid, who voted to keep policy stable. (There was also a dissent from Federal Reserve Governor Stephen Miran, who voted to cut rates by 50 basis points instead of 25. Recently appointed by President Trump to the Federal Reserve, Miran’s dissent was not a surprise, as he had done the same at the previous Fed meeting.)
Inflation remains too high
In a brief essay Friday explaining his vote not to cut rates, Schmid questioned the Federal Reserve’s need to ease conditions, pointing to stocks at record highs, tight corporate bond spreads and strong levels of high-yield bond issuance.
Inflation, he recalled, has remained above the Federal Reserve’s 2% target for years and has stopped falling. “I take little comfort that most measures of inflation expectations have not increased,” he said.
But what about the deterioration of labor market conditions? Schmid suggested there’s not much the Fed can do about it, blaming “structural changes in technology and demographics.”
Markets fall
Amid a decent bounce after yesterday’s tantrum, markets on Friday morning pulled back a bit in response to Schmid’s comments, with bitcoin falling below $110,000 and Nasdaq futures now up just 1.3% versus 1.7% previously.
Rates traders are now pricing in just a 66% chance of a rate cut at the Federal Reserve’s December meeting, down from 73% yesterday and almost 95% before Powell and Schmid’s surprise on Wednesday.
