Essentially, the argument among the modest hawkish policymakers is that upside risks to inflation have diminished and the downside threats to the labor market have dissipated. This was evident in the FOMC statement, which stripped out a passage that referenced a higher risk of deteriorating employment conditions than of rising inflation.
In other words, most of the monetary authorities are playing the waiting game, but some want to play Hungry Hungry Hippos.
Wall Street believes Jerome Powell will leave policy on hold until his term expires in May. Futures market data suggest investors anticipate the first 25-basis-point interest rate cut in June. In a world of lag effects and a quickly evolving economy, this can be a lifetime, especially for the White House.
Yes, but …
A few comments that might have made President Donald Trump sit up came when Powell conveyed to reporters that once prices fall, the Fed could restart its rate-cutting cycle. Powell purported that he expects, over the coming year, “the effects of tariffs flowing through goods prices peaking and then starting to come down, assuming there are no new major tariff increases that are begun.” After this happens, the policy constraints can be loosened.
At the same time, potentially perturbing former President Harry Truman, who quipped about a one-handed economist, Powell asserted that policy is already “loosely neutral.” Policymakers have been debating whether the Fed is at or close to neutral, meaning a policy stance neither restrictive nor accommodative.
“Many of my colleagues think it’s hard to look at the incoming data and say that policy is significantly restrictive at this time,” he said.
Either way, according to the central bank chief, the Eccles Building is prepared to handle any development heading its way.
“After the three recent rate cuts, we’re well-positioned to address the risks that we face on both sides of our dual mandate,” he stated. “We haven’t made any decisions about future meetings, but the economy is growing at a solid pace,” he continued. “The unemployment rate has been broadly stable, and inflation remains somewhat elevated. So we’ll be looking to our goal variables and letting the data light the way for us.”
Rick Rieder Out of Nowhere
A few weeks ago, BlackRock executive Rick Rieder was considered highly unlikely to be selected as the next head of the Federal Reserve System. Then, following his meeting with the president, the Wall Street insider catapulted to the top of the prediction markets, surpassing the likes of former Fed Gov. Kevin Warsh and National Economic Council director Kevin Hassett.
Prior to the Jan. 28 meeting, Rieder was polling firmly above 40%. Hours after the policy gathering, Rieder’s odds fell and became tied with Warsh, according to Polymarket.
Warsh is seen as somebody who will overhaul the central bank. Hassett is viewed as a candidate who will slash interest rates. Rieder might be considered a leader who will trim interest rates and lend credibility to Trumponomics at the Federal Reserve, similar to Scott Bessent’s ascent to the Treasury Department.
During his media rounds, Rieder’s comments suggest he would grab a little bit of Warsh and a little bit of Hasset to craft policy. Put simply, he would employ modest rate cuts, arguing that the Fed’s main tool can substantially help low-income households and small businesses.
What Now?
Fed officials will have a treasure trove of data available by the time they meet for their next two-day policy meeting in March: two job reports, a bunch of inflation data, and fourth-quarter GDP. The world may also find out Jerome Powell’s successor. For now, the Fed will rest in the background as everyone else watches gold, silver, and stocks soar to record highs, with the US dollar facing tremendous volatility, and the Japanese government bond market threatening global financial markets.
Stay tuned in March when the Fed wins the award for Best Daytime Drama.
