MNI POLICY: Fed Most Divided Since Start Of Hikes, More Loom

The Federal Reserve is approaching its June policy meeting at its most divided since the central bank began raising interest rates last year, with officials torn between pushing ahead with another quarter-point rate increase or pausing to see how the data evolve -- though further hikes seem increasingly likely at some point.

Fed governor and vice chair nominee Philip Jefferson seemed to tip the scales in favor of a "skip" in a speech Wednesday, flipping market expectations for a hike in June back to a pause. “Skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming,” he told a Fed conference in Washington.

Before the string of strong data this month, Fed Chair Jerome Powell appeared to signal his preference for a pause in remarks that stressed the idea that financial sector strains might mean less need for monetary tightening. Still, the latest PCE inflation reading Friday suggested progress on the inflation front has stalled. There are still two major data releases ahead of the June 13-14 meeting – payrolls and CPI for May. (See MNI INTERVIEW: Sticky Prices Could Require More Hikes-Fed Econ)

It is also clear that several Fed officials, including Fed Board governors Michelle Bowman and Christopher Waller, and regional president voters Neel Kashkari and Lorie Logan of the Minneapolis and Dallas Fed banks, respectively, believe further rate hikes are in order – even if they are willing to line up behind a hawkish June pause.

RARE DISSENTS

In a consensus-driven Fed, a dissent is still a low-probability event, although the chances of one are rising as internal disagreement grows around whether the Fed has done enough to ensure that inflation is heading sustainably back down to its 2% target. (See MNI INTERVIEW: Fed Pause Could Make Inflation More Entrenched)

Minutes for the Fed’s May meeting highlighted this divide, with “many” participants citing the need for “optionality,” while “some” members saw the likely need for additional tightening and “several” believed the central bank might have already completed its monetary tightening cycle.

The last time a Fed board governor delivered a dissenting vote on monetary policy was in 2005, when Mark Olson argued against a quarter-point rate increase.

Fed presidents dissent more often, with the most recent dissenting votes coming from former Kansas City Fed President Esther George in July 2022 and James Bullard of St. Louis in March 2022. Not all Fed presidents vote in any given year because of a rotating system that concentrates power at the board and the New York Fed, whose president is also vice chair of the FOMC.

CONSENSUS BUILDER

Fed Chair Powell has been especially adept at building consensus around the FOMC table. Since he took over the chair in 2018 there have been only 13 dissenting votes. Ex-Fed Chair Janet Yellen’s four-year term saw 22 dissents while her predecessor Ben Bernanke experienced 48 dissents over his eight-year stretch at the central bank's helm.

The most likely candidate for a hawkish dissent if the Fed does decide to pause would be Kashkari, who has not been shy about voting against the grain in the past. Logan could also take issue with a pause given her argument that inflation has not made enough progress.

In contrast, the most likely dovish dissents would come from Patrick Harker of Philadelphia and Austan Goolsbee of Chicago. who are also FOMC voters this year.