"Fed's September Gathering Reveals Growing Disagreement on Policy Direction"

The Federal Open Market Committee (FOMC) is expected to experience notable disagreement at its September 16–17 gathering, as three members are set to argue for keeping interest rates steady, potentially clashing with the prevailing push to lower rates by a quarter point. This division underscores the increasing intricacy of the Fed’s policy choices, with ongoing inflation concerns and a weakening job market shaping the internal debate.

Projections indicate that the Fed will reduce rates by 25 basis points, though this move will not receive unanimous support. Kansas City Fed President Jeff Schmid, Cleveland Fed President Beth Hammack, and Chicago Fed President Austan Goolsbee have all signaled their preference to leave rates unchanged. Their position is rooted in worries that persistent inflation—partly a result of tariffs from the Trump era—may become more deeply embedded, threatening the Fed’s credibility over the long term. These officials warn that rising prices, especially for imported goods, could make higher inflation a new norm.

On the other hand, some members are advocating for deeper rate cuts. Governors Chris Waller and Michelle Bowman are likely to dissent in favor of a 50-basis-point reduction, with Waller having already made his position known. Stephan Miran, newly serving on the FOMC in a temporary role, will join them, having consistently called for further monetary easing. He believes the current stance is tighter than previously thought. However, his influence may be muted, as markets have often overlooked his views due to his appointment’s political nature.

The FOMC will also publish its Summary of Economic Projections (SEP), which is anticipated to show most members expect three rate reductions in 2025, starting in September. These projections may reveal a slight downward adjustment in the central bank’s estimate for the neutral rate, lending further support for policy easing. Still, debates over how quickly and how far to cut rates are likely to become even more contentious amid persistent economic uncertainty.

Experts point out that the Fed’s task of balancing inflation against employment is growing more complex. Despite clear signs of labor market softening—such as a pronounced hiring slowdown—concerns remain about a resurgence of inflation pressures. The situation is further complicated by the lagging effects of previous rate hikes and the ongoing aftermath of inflation linked to the pandemic. The Fed’s reputation has also suffered, as many perceive its actions against inflation as tardy and insufficient, fueling worries that rising inflation expectations could become self-perpetuating.

Investors are paying close attention to any hints about the direction of upcoming rate cuts. The CME FedWatch tool places a 96% likelihood on a 25-basis-point reduction in September, with just a 4% chance of a more substantial 50-basis-point cut. Economists will also be scrutinizing whether the FOMC offers specific guidance regarding additional cuts later in the year, particularly in October and December. Any lack of clarity could trigger market volatility, as investors have already factored in a strong easing cycle for the rest of 2024.

The disagreements within the FOMC reflect the larger hurdles confronting monetary policy as economic signals and political influences increasingly diverge. Preserving the Fed’s autonomy while navigating these competing pressures will be vital to the success of its future policy decisions.