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The Fed’s dissenters are laying out their case for cutting interest rates.
This week, Jerome Powell and the central bank opted to keep rates unchanged, but there was a rare double dissent from two Fed officials. It was the first time two governors had dissented in 30 years.
Powell, for his part, has continued to insist that the Fed is still “a ways away from seeing where things settle down,” regarding President Donald Trump’s tariffs and the impact on inflation.
Yet, two members of the Federal Open Market Committee disagreed, and on Friday, they each released statements unpacking their views.
Governor Christopher Waller and Vice Chair for Supervision Michelle Bowman have both previously advocated for cutting interest rates, and reiterated their views at this week’s meeting.
Both expressed concern regarding the US labor market, and newly released data may back up their claims. The nonfarm payroll report on Friday showed that the US economy added 73,000 jobs in July, fewer than expected. May and June also saw figures revised lower by a combined 258,000, pointing to a weakening labor market.
Here’s why the two Fed governors say the Fed need to cut rate.
Waller’s argument
Widely considered a likely candidate to replace Powell as chairman of the Fed, Waller has been an outspoken critic of the decision not to cut interest rates this year.
In his dissenting opinion, he reiterated the argument that reducing it by 25 basis points made sense.
Waller laid out three primary reasons:
1) Tariffs are “one-off increases in the price level” and lead to only temporary increases in inflation.
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2) Multiple data points make the case that monetary policy should be less restrictive. These included real Gross Domestic Product (GDP) growth, the unemployment rate, and total inflation.
3) While the labor market has appeared “fine on the surface,” Waller said that “other data suggest that the downside risks to the labor market have increased.”
“The data imply the policy rate should be around neutral, which the median FOMC participant estimates is 3 percent, and not where we are—1.25 to 1.50 percentage points above 3 percent,” Waller said in his statement.
Bowman’s argument
Bowman also argued that the Fed should reduce interest rates by 25 basis points. In her argument, she primarily focused on the strength and resilience of the US economy.
“With economic growth slowing this year and signs of a less dynamic labor market, I saw it as appropriate to begin gradually moving our moderately restrictive policy stance toward a neutral setting,” she said.
Bowman added that she believes such action would serve as an effective hedge against less-than-optimal economic conditions and potential problems in the labor market.
She noted that while the unemployment rate has remained low through June and total payroll employment displayed modest increases, the labor market had become “less dynamic” and showed “increasing signs of fragility.”
Bowman also highlighted concerns regarding the Fed’s employment mandate, speculating that if conditions do not show improvement soon, firms may be forced to lay off workers, a trend that has already taken shape.
“As I recognize that economic conditions are shifting,” she added, “I believe that beginning to move our policy rate at a gradual pace toward its neutral level will help maintain the labor market near full employment.”
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