Talking Fed Heads Tap the Brakes

If the two parts of the Federal Reserve’s “dual mandate” conflict, which would they favor?  Stable prices, or full employment?  Would they be willing to cut rates in the face of rising prices if the labor market softens markedly?  Or would they refrain from re-stoking inflationary embers even if the economy seems to falter?  I know that I’m not alone in pondering these key questions.  In the past couple of days, we got some clues.

In an interview with CNBC yesterday, Atlanta Fed President Bostic addressed the issue directly, saying:

I worry a lot about the inflation side, and mainly because we’re seeing expectations move in a troublesome way. … That will make our job harder…

For me right now, I’m expecting it’s going to take a bit longer for that to sort out. … I’m leaning much more into one cut this year, because I think it will take time, and then we’ll sort of have to see…

And in a Bloomberg interview, he said:

Given the trajectory of our two mandates, our two charges, I worry a lot about the inflation side, and mainly because we’re seeing expectations move in a troublesome way

That indicates that at least one Fed President would rather get clarity about how tariffs are affecting price levels before recommending action.

Bostic, however, is not currently a voting member of the FOMC.  But New York Fed President Williams is.  His comments echo those of his southerly-based colleague:

“It’s not going to be that in June we’re going to understand what’s happening here, or in July,” Williams said Monday at a conference organized by the Mortgage Bankers Association. “It’s going to be a process of collecting data, getting a better picture, and watching things as they develop.”

Fed Vice-Chair Jefferson added:

“Given the level of uncertainty that we’re facing right now, I believe that it is appropriate that we wait and see how the policies evolve over time and their impact,” Jefferson said, adding that monetary policy is in a “very good place.”

It seems as though markets have gotten those messages.  The CME Fed Watch tool shows that futures are not indicating the likelihood of a full cut until October. 

Herein lies the critical issue for investors.  If the consensus among the Federal Reserve is to favor a wait-and-see approach toward cutting rates, they run the risk of moving too late if economic conditions worsen.  As of now, neither worrisome price pressures nor weak employment are evident in the data.  We have seen awful sentiment data, but that has not yet translated into hard data.  But it means that investors need to be highly vigilant about whether either of the dual mandate pillars falter.  We can move faster than the FOMC, and if the committee is understandably more concerned about the risk of reigniting inflationary embers than a pullback in the labor force, investors need to be prepared to act — even if equity investors seem rather unconcerned about those prospects.