Dissent is rising at the Federal Reserve

One of the best metaphors for the current uncertainty over the US economy is that we are living with Schrödinger’s data. Before the Bureau of Labor Statistics lifts the cat flap, the US labour market can be both dead and alive.

The problem last week was that the metaphor failed. When the BLS published the September jobs report, it also showed evidence of strength and weakness in the labour market. Unemployment rose to 4.4 per cent and almost ticked higher to 4.5 per cent, the highest since October 2021. But payroll growth was the strongest reading since April at 119,000. Thanks, BLS.

Although the data did not help, the longer-term trends are still clear. Broad measures of tightness in the US labour market show a significant cooling since 2022, but the levels of these indicators are mostly still above their averages for the 2000-2019 period. They cannot yet be considered weak.

So we are in Schrödinger’s labour market. It is reasonable to think either that the labour market is not quite back to a level consistent with 2 per cent inflation, or that the recent deterioration will continue, generating unnecessary economic weakness.

That sort of nuance will not get you very far in today’s US, though. President Donald Trump last week again insulted Fed chair Jay Powell, urged Treasury secretary Scott Bessent to fix the “too high” rates and, pointing at Bessent, joked he would “fire his ass” if he didn’t sort the central bank out. Earlier in the week, the Treasury secretary protested again that he would not be picked for Fed chair and teased that “President Trump would make a great Fed chair. He has an open mind, he understands monetary policy better than a lot of people on the Fed.” (8 mins 15 secs)

The Federal Open Market Committee is much more serious. The atmosphere there is one of division and dissent.

Among the Fed board of governors, Stephen Miran, Michelle Bowman and Christopher Waller have all indicated that they think another rate cut is warranted this year. Waller’s views were pretty fixed when he spoke in London last week: “You can’t just say [inflation] has been above target for five years, so I’m not going to cut. You’ve got to give me some better answers than that,” he said of his opponents on the FOMC. (47 mins)

The remaining four board members have been more equivocal, but many of the regional Fed presidents have been making the case for holding rates at 3.75 to 4 per cent. Boston Fed president Susan Collins, for example, said earlier this month it would “likely be appropriate to keep policy rates at the current level for some time”.

For a full rundown, head over to the FT’s Monetary Policy Radar, where Elettra Ardissino has collated all the latest views of Fed officials.

The disagreements spilled out in the FOMC’s October meeting minutes. And, until New York Fed president John Williams gave a dovish speech last Friday, financial markets were unusually uncertain about the next meeting, seeing roughly a 50:50 probability of another quarter-point cut in December. (This has now risen to a 75 per cent probability of a cut.)

Even if the outcome is clearer now, in his London speech, Waller said everyone should “get ready” for a close vote. Having been a “very consensus-driven policy committee” that believes it is better to have unanimity or an 11-to-one decision, he warned observers that the December meeting was likely to be different.

“You might see the least groupthink you’ve seen from the FOMC in a long time.” He added that this would only become a problem, in his view, if the vote got as close as seven to five, when one person switching sides could change the monetary policy trajectory. (37 mins, 40 secs)

Having more dissent on the FOMC is natural when there is tension between the Fed’s inflation and maximum employment mandates. But it will mark a huge change from recent history. Of the 12 voting FOMC members, the last time there were three dissents was in 2019. The last time four members voted against the chair was in 1990. And the last time five members did was in 1973.

Because the number of meetings has changed over time and the FOMC does not always have 12 voters, I have collated the annual dissent rate in the chart below. The Fed generally reaches consensus, with only 15 per cent of voters dissenting in the peak year of disagreement in 1979. That is the equivalent of a 10-to-two vote.

This century, Fed governors have not dissented until recently, with just one or two dissenting votes per meeting.

So long as the different voices do not follow political lines, Waller is right, I think, to say monetary policy can run with more public disagreement. In the UK, for example, the US level of dissent appears trivial. Dissenting votes in the UK’s Monetary Policy Committee are running at more than 30 per cent this year, and generally dwarf those of the US.

Given the similarity of UK and US inflation performances, it is probably best to conclude that whether committees show internal consensus is not of huge importance in setting monetary policy.

What I’ve been reading and watching

• The former chair of the US Federal Deposit Insurance Corporation makes the correct but rarely followed call that sustained housing affordability comes from loosening supply rather than demand incentives.

• Alan Beattie is spot on in a rather downbeat assessment of multilateral organisations. For a supporter of them to be this mean shows they are doing very little of use.

• Martin Wolf finds it hard to be optimistic about the UK ahead of Wednesday’s Budget.

• Fed governor Lisa Cook warns that hedge funds’ so-called basis trades in the US Treasury market are potentially destabilising financial markets.

One last chart

If you want to summarise the biggest conundrum in the UK economy in one chart, pick the one below. Before Covid-19, UK consumers could be relied upon to spend money. Even the 2008-09 global financial crisis did not interrupt the upward march for long.

Then the pandemic happened and real spending growth stopped, even though real incomes rose. It is imperative to understand why people are suddenly so unwilling to spend, because it matters for the strength of UK growth, the attractiveness of investment and the appropriate setting of monetary policy. Similar trends are not apparent in the US or Eurozone.

On the BoE’s MPC, Catherine Mann explains the weakness as the result of psychological scars of high inflation post-Covid. As a result, she wants to keep interest rates high to eradicate above-target inflation. Swati Dhingra, by contrast, thinks real household income growth and savings are not as strong as official figures suggest, so it is easy to understand consumption weakness. She wants to lower interest rates to rectify this.

The debate is important, and shows that it is not just the US where economists come to opposite conclusions from the same data.

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Central Banks is edited by Harvey Nriapia