If it is possible for a central bank to reduce rates while remaining hawkish, the US Federal Reserve did so this week.
At his post-meeting news conference on Wednesday, Fed Chairman Jerome Powell hit markets with an unexpected setback, insisting that a December rate cut was far from a done deal. The reaction was swift, with cryptocurrencies and U.S. stocks falling Wednesday afternoon and all day Thursday.
There was also the vote in favor of lowering rates. A group of friends, FOMC members generally vote unanimously on policy. Wednesday’s decision, however, was accompanied by dissent from Kansas City Fed President Jeff Schmid, who voted to maintain his policy. (There was also dissent from Fed Governor Stephen Miran, who voted to cut rates by 50 basis points instead of 25. Recently appointed by President Trump to the Fed, Miran’s dissent was not a surprise since he had done the same at the previous Fed meeting).
Inflation remains too high
In a short essay Friday explaining his vote not to cut rates, Schmid questioned the need for the Fed to ease conditions, noting that stocks are at all-time highs, corporate bond spreads are narrow and high-yield bond issuance is strong.
Inflation, he recalled, remained above the Fed’s 2% target for years and stopped falling. “I take little comfort from the fact that most measures of inflation expectations have not increased,” he said.
But what about deteriorating labor market conditions? Schmid suggested there was little the Fed could do about it, blaming “structural changes in technology and demographics.”
Markets slide
Amid a decent rebound from yesterday’s meltdown, markets fell slightly Friday morning in response to Schmid’s comments, with bitcoin falling back below $110,000 and Nasdaq futures rising just 1.3% from 1.7% earlier.
Rates traders now rate the chance of a rate cut at the Fed’s December meeting at just 66%, down from 73% yesterday and nearly 95% before Powell and Schmid’s surprise on Wednesday.
