The winds of change are blowing through the Federal Open Market Committee (FOMC): Fed presidents who previously resisted market pressure to axe interest rates are now saying they too want a cut.
The fact that Federal Reserve bank presidents are shifting their stance will be welcomed by the market. It signals the FOMC is keeping a close eye on both halves of its dual mandate: lowering inflation and maximizing employment.
It is the latter half of this mandate that FOMC members are now turning their attention to, concerned that if they keep monetary policy too tight for too long, the economy will cool to the extent that people lose their jobs.
While the FOMC have been steadfast in ignoring pressure from the market and politicians, recent data has begun to sway their views.
In one example, a report from the U.S. Bureau of Labor Statistics last week revealed that unemployment rates in metropolitan areas are creeping up while demand for workers is softening.
Bostic shift
Previously Atlanta Fed President Raphael Bostic was on the more cautious end of the scale when it came to cutting.
Indeed, as recently as last week Bostic was cautioning his FOMC peers about cutting too quickly and then being forced to hike rates again.
This would be, he told an event organized by the Stanford Club of Georgia and the Stanford Black Alumni Association–Atlanta, “a very bad outcome.”
“If I’m going to err on one side, it’s going to be waiting longer just to make sure that we don’t have that up and down,” he added, per Reuters.
But in a new note titled “Shifting focus to both sides of the dual mandate” posted to the Atlanta Fed website on Sept. 4, Bostic hinted his thoughts were changing.
“I have focused mainly on the price stability side of the mandate since inflation spiked in 2021, as we were clearly further from that goal than from the goal for maximum employment,” he wrote. “But as the labor market has cooled in recent months, the balance of risks has shifted, and I am today giving basically equal attention to the maximum employment objective.”
Bostic’s change of heart is the result of a range of factors. Employers have told the Atlanta Fed they are hiring more cautiously, for one.
Secondly, the Atlanta Fed’s Business Inflation Expectations survey for August found the number of firms that report having job openings declined by almost 10 percentage points from June 2023 to June 2024, from 79% to 70%.
And finally, he wrote, the “extraordinarily high wage growth” that occurred during the pandemic is now peeling back to a level “more conducive” to price stability.
“Rest assured, I do not sense a looming crash or panic among business contacts,” he continued. “However, the data and our grassroots feedback describe an economy and labor market losing momentum.”
Reaching 2%
The more pressing half of the Fed’s mandate since the pandemic has been wrangling rampant inflation back down to the target of 2%.
It hasn’t been an easy task—and was one that some experts didn’t think could be done without massive downsides.
Former Treasury Secretary Larry Summers believed that to bring inflation into the 2% range, unemployment would have to spike to 6%, and the economy would have to shrink.
JPMorgan CEO Jamie Dimon is still skeptical that inflation—at an annualized rate of 2.9% for 2024 thus far—will even reach the target.
Bostic believes the FOMC cannot wait for that figure to hit 2% before cutting, but says he will still be keeping a sharp eye on the metric.
“I am not quite prepared to declare victory over inflation,” he added. “Though they have declined significantly, risks to meeting our price stability mandate remain. So, we must stay vigilant to ensure those risks continue to wane.
“At the same time, we must not maintain a restrictive policy stance for too long. I believe we cannot wait until inflation has actually fallen all the way to 2% to begin removing restriction because that would risk labor market disruptions that could inflict unnecessary pain and suffering.”
Of course Bostic—or any of the other FOMC members—would never promise a cut ahead of a meeting.
But the Atlanta Fed President’s sentiments have been echoed by the likes of Chicago Fed President Austan Goolsbee.
While Gooslbee earlier this year said he was holding out for further data, he made it clear in an August interview in Fortunethat the balance was tipping.
“We need to be cognizant of being this tight for too long, because if we are, we’re going to have to think about the real side of the mandate, and employment is gonna get worse,” he said.
