A group of Federal Reserve policymakers sent a clear warning to Fed chair candidate Kevin Wersh on Wednesday: They’re not ready to cut interest rates.
The central bank’s rate-setting committee voted to keep borrowing costs steady in what will likely be Jerome Powell’s last meeting as chairman. But the three regional Fed chairmen – a quarter of the central bankers who vote on policy – disagreed on language in a post-meeting statement that suggested the next time the Fed changes rates, they will have to be cut.
The extraordinary move means that if Wersh is confirmed by the Senate next month, he will have his work cut out for him if he wants to meet President Donald Trump’s demands for lower borrowing costs.
Warsh had additional news today: Powell said in his post-meeting press conference that he plans to stay on as governor after his presidency ends, which would at least temporarily prevent Trump from filling another position on the central bank’s board. Powell explained that his decision was linked to the Justice Department’s moves to launch a criminal investigation into the Fed’s headquarters renovation and that he was otherwise prepared to retire.
The DOJ said Friday it would refer the investigation to the Fed’s inspector general. This opened the way for the senator. Thom Tillis (R-N.C.) to end its blockade of Fed nominees, as he saw the investigation as an effort to undermine the central bank’s independence.
Powell, who has expressed similar fears, said that although he was “encouraged” by the DOJ’s move, he would wait to leave the Fed board until the investigation is “well and truly over with finality and transparency.” He said he planned to keep a low profile after his presidency and congratulated Warsh, who was approved on a party-line vote by the Senate Banking Committee on Wednesday, on the progress of his nomination.
“There is only one chairman of the Federal Reserve Board,” Powell told reporters.
A Fed chief has to deal with a vast committee of Washington-based board members and regional Fed chairmen, a task to which Powell has made extensive efforts. She has followed the practice of her predecessor, Janet Yellen, who spoke to every member of the committee before each rate-setting meeting.
Varsh previously served as a member of the Fed Board from 2006 to 2011. But he will have to build goodwill among its current policymakers, especially given his harsh criticism of the institution. He has suggested that Fed officials should speak less publicly, although as chair he would not have direct control over whether they do so.
The language of the statement that the three policymakers — Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Laurie Logan — objected to was in previous iterations of the document, which is typically revised only in small ways after every meeting to reflect the latest economic developments.
But central bank officials have become more cautious about the possibility of inflation accelerating again in the wake of the war in the Middle East, which has pushed oil prices consistently above $100 a barrel. Their disagreement indicates that they now view a rate hike as just as likely as a rate cut.
“When considering the extent and timing of additional adjustments to (the Fed’s policy rate), the Committee will carefully assess incoming data, the emerging outlook, and the balance of risks,” according to the statement. The term “additional” suggests a bias toward rate cuts, as the Fed cut rates three times as recently as late last year.
There was also disagreement over the substance of the decision. Fed board member Stephen Miron, who served as Trump’s chief economist last year, prioritized lowering rates. But Meeran’s term has ended and Warsh has been nominated for that open board seat, meaning Meeran will have to step down once Warsh is confirmed, as expected.
The last time four officials dissented was during a Fed rate meeting in October 1992.
It’s not clear whether Wersch will push for an immediate rate cut, although Trump has indicated he expects so. Powell warned in his press conference that the Fed’s independence is “at risk.” The president has attempted to fire fellow board member Lisa Cook, a case that is before the Supreme Court, and the Feds have also fought the administration over its subpoena.
“We have to resort to the courts to enforce our legal system – it’s not so much freedom – it’s really the ability to make monetary policy without political considerations,” he said. “We have been successful so far, but it is not over.”
