Why inflation hawks and doves no longer conform to party lines
An unexpected ally in Monday’s Federal Reserve discussion emerged: Governor Lisa Cook, the official Donald Trump sought to remove this summer.
Cook, appointed by Biden and currently suing Trump over his removal attempt, delivered remarks suggesting that risks to employment are more significant than the potential for inflation increases. This aligns with Trump’s ongoing push for more aggressive rate cuts from the Fed.
This partnership is complicated. Cook’s legal battle against Trump reached the Supreme Court in January and is viewed as a significant test of the Fed’s independence. However, she and Trump-appointed governors find themselves at odds with opposing party leader Obama over the central issue of whether to prioritize inflation control or support the labor market.
In some respects, this situation is positive. Monetary policy should transcend party affiliations, especially when economic data is unclear and unreliable. Currently, federal funds futures suggest only a 65% chance of a rate cut in December, down from 94% the previous week, as last Wednesday’s Fed meeting highlighted deep divisions within the central bank.
Left and right perspectives
Cook isn’t the sole Fed official advocating for further rate reductions. Michelle Bowman and Christopher Waller, both Trump appointees, have also become strong proponents within the central bank. At an event on October 14, Bowman indicated expectations for “two more rate cuts by year’s end,” while Waller expressed, “My focus is on the labor market.”
Stephen Milan, a more recent appointment by Trump, took a firmer stance. At the October meeting, he disagreed with his colleagues, advocating for a 50 basis point rate cut, effectively doubling the proposed reduction.
The shared reasoning among the dovish camp includes two main points. They argue that inflation driven by Trump’s tariffs is a ‘one-time spike’ rather than a persistent trend; furthermore, they acknowledge the troubling state of the labor market and the urgency for action.
Recent statistics seem to back their inflation argument. A manufacturing survey released Monday noted signs of easing price pressures, with the Institute for Supply Management’s Prices Paid Index declining to 58.0 in October from 61.9 in September. Similarly, S&P Global observed that while input price inflation remains “historically high,” October marked the lowest level since February. Both studies attributed persistent cost pressures mainly to tariffs but suggested a slowdown may indicate relief in the supply chain.
As Bowman described it, she feels “more confident that tariffs won’t produce lasting shocks to inflation” and emphasizes the need to focus on risks to employment.
Cook underscored the importance of labor market issues, highlighting that “both youth and Black unemployment rates are rising more sharply than the total unemployment rate,” which reflects growing economic pressures on low- and middle-income families in what she calls a “two-speed economy.”
The manufacturing survey also pointed to concerning trends for employment. Both ISM and S&P Global reported weak labor market conditions in manufacturing, with ISM’s employment index contracting at 46.0, while S&P Global noted that employment growth remained “moderate.” Meanwhile, business confidence continues to lack vigor; S&P Global identified “uncertainty in U.S. trade policy” as a key factor dampening business optimism, which has dropped to its lowest point since April.
Hawkish opposition
What might prompt opposing factions to scale back? Austan Goolsby, president of the Chicago Fed and a former member of the Obama administration, has voiced concerns. In an unexpected pivot from leftist priorities, Goolsby expressed on Monday that he feels “anxious about inflation,” which has exceeded target levels for over four years and is trending in the wrong direction.
Goolsby’s sentiments resonate with a growing number of regional Fed presidents. Jeffrey Schmidt from Kansas City voiced opposition to changing rates at the recent October meeting, arguing that “inflation is too high” and cautioning that cuts could jeopardize the Fed’s commitment to its 2% inflation target.
Cleveland Fed President Beth Hammack and Dallas Fed President Laurie Logan have publicly stated they would have preferred to maintain the current rates instead of cutting them in October. Even Atlanta Fed President Rafael Bostic, who supported the rate cut, indicated unease about shifting policy toward neutral while inflation levels remain elevated.
Concerns in this camp are grounded in the results indicating: core inflation sat at 3% in September. This figure starkly exceeds the Fed’s target and shows minimal signs of improvement. The painful lessons from 2021 to 2023, when the Fed initially downplayed inflation as “temporary,” have left these officials wary of making that same miscalculation again.
The voices of the hawks have grown loud enough to capture market attention, with probabilities for December’s rate cuts plummeting. This shift followed revelations from the October meeting that emphasized divisions. Chairman Jerome Powell’s caution regarding a December cut, stating it was “not a foregone conclusion,” reflects a real stalemate.
The pressing question now is whether the economic data will point in any clear direction and if forthcoming evidence will resolve the impasse ahead of December’s meeting. More insights on this will follow in tomorrow’s briefing.
