Fed Policy Split Challenges Powell's Consensus-Building Leadership

Key Takeaways

• Growing dissent among Federal Reserve officials regarding interest rate cuts.
• Challenges faced by Fed Chair Powell in maintaining consensus.
• Impact of the division on the Fed's effectiveness and credibility.
• Diverging views on inflation and the labor market.
• Difficulty in predicting Fed's next moves amid the split.

Federal Reserve policymakers are showing a growing divide over whether to continue cutting interest rates, fracturing a long-held consensus under Chairman Jerome Powell's leadership.

At the end of October, the Fed narrowly decided to lower interest rates by 25 basis points, with two policymakers dissenting: one favored holding rates steady, while the other called for a more aggressive cut. The simultaneous opposing dissents were the first since 2019. Earlier this year, it was the first time in over three decades that more than one Fed governor dissented.

The widening rift among Fed officials has spilled into public remarks in recent days, posing a challenge for Powell, who has strived to maintain consensus among his colleagues.

The division is a direct result of uncertainty in the U.S. economy and the impact of President Trump's aggressive trade policies. The murky economic outlook has split the rate-setting committee charged with maintaining labor market stability and tamping down inflation. Some Fed officials want to continue focusing on curbing high prices, believing tariffs could drive up inflation. Others say it is time to prioritize the weakening labor market.

Economists say a divided Fed could have mixed impacts, but in any case represents an extraordinary shift in the political ecology of the world’s most powerful central bank.

"If these philosophical differences cannot be reconciled, that could affect the Fed’s effectiveness and credibility," said Derek Tang, an economist at monetary policy analysis firm LHMeyer. "In the next decade or so, the Fed could become like the Supreme Court, where people vote along party lines."

The Fed Chair's Difficult Task

As the leader of the Fed and chairman of the influential rate-setting committee, Powell now faces a daunting task, the outcome of which may be beyond his control.

Over the past few decades, Fed chairs have played an increasingly important role in guiding the central bank’s policy decisions through meticulous consensus-building.

According to Jon Hilsenrath, a veteran Fed watcher and senior advisor at StoneX Group, the Fed chair's role of seeking agreement began under former Chairman Bernanke. This included regular meetings with members of the Fed’s seven-person Board of Governors and the 12 regional Fed presidents.

"Powell continued the practice of Bernanke and Yellen," Hilsenrath said. "But this breakdown in consensus is beyond Powell or his leadership."

At a press conference following the Fed’s October decision, Powell said officials had “sharply different views” about how to proceed. Previously, he had characterized the divergence merely as a “healthy debate.”

Dissent from Fed officials is expected to persist through the final few meetings of Powell’s term (which ends in May). That could make it difficult for Wall Street to predict the Fed’s next move: according to futures market data, a December rate cut currently looks like a coin flip.

Today, the Fed’s decision-making is indeed far more complicated: during the COVID-19-induced economic downturn in 2020, it was clear that the Fed needed to drastically reduce borrowing costs—and keep rates super-low—to shore up the devastated economy. Likewise, in 2022, it was equally obvious that the Fed needed to aggressively hike rates to tame the fastest inflation in four decades.

At the same time, a more divided Fed may be a good sign for its credibility.

“The market also may conclude they’re not going to make extreme choices or lock themselves into decisions that might steer the economy and financial system in the wrong direction,” Hilsenrath said. “If there’s more disagreement, that makes Fed behavior somewhat more moderate.”

To Cut, or Not to Cut?

Assessing the economy became more difficult during the longest government shutdown in U.S. history, which suspended weeks of economic data releases. At the October meeting, Fed officials lacked key data on inflation and employment, crucial indicators for policymakers when considering how to fulfill their dual mandate.

With the government reopened, an upcoming flood of data could easily tip the scales in either direction.

On the side favoring holding rates steady to curb inflation are three of the four regional Fed presidents with voting rights this year. Kansas City Fed President Jeffrey Schmid dissented against a rate cut in October. He explained in a statement that his decision was partly due to the fact that his region’s constituents “widely expressed concern about persistent increases in costs and inflation.”

His colleague, St. Louis Fed President Musalem (also a voting member this year), said: “We need to proceed carefully because I think there’s limited space to ease further before monetary policy becomes overly accommodative,” at an event in Evansville, Indiana, last Thursday.

Last Wednesday, Boston Fed President Collins said she would be “hesitant to ease policy further” and that “in the current highly uncertain environment, it may be appropriate to hold the policy rate at its current level for a time to balance inflation and employment risks.”

Meanwhile, the opposing camp—officials who believe the Fed should continue cutting rates—mainly think tariffs are unlikely to have a lasting impact on inflation. They also argue that the labor market faces the risk of falling off a cliff if rates aren’t cut quickly enough.

Fed Governor Michelle M. Meili (who has taken leave from his position as chairman of Trump’s Council of Economic Advisers to fill a temporary seat on the central bank’s board) dissented against the Fed’s decision to cut rates by 25 basis points last month, instead favoring a more aggressive cut of 50 basis points.

In his latest remarks, he argued that borrowing costs are putting more pressure on the economy than most people imagine and that inflation, in any case, is destined to slow “substantially.”

Aligned with Meili’s view are fellow Trump-appointed Fed Governors Bowman and Waller, who have been calling for rate cuts since July. They argue that since inflation is close enough to the Fed’s 2% target rate, the main concern should shift to the weakening labor market.

“If you tighten policy this much and for this long, then you run the risk that monetary policy itself triggers a recession,” Meili said in a New York Times interview published Nov. 1. “If I wasn’t worried about inflation on the upside, I don’t see any reason to take that risk.”