What this economist is watching for

00:00 Speaker A

That’s why we’re looking for this rate reduction. But probably more importantly, we look at the guidance and we also look at the naysayers. So what will you watch most on Wednesday?

00:13 Speaker B

Yes, I think two things about guidance. First I would say the explanation. Are we clearly seeing a change in forward guidance? Do they write something like the scope and timing of any additional interest reductions or do they say any additional interest reductions, so leave out the scope and timing. Any of them would probably be a little more hawkish, as that would perhaps imply that they won’t be making further cuts. The scope and timing still imply some cuts at some point.

00:46 Speaker B

But I say call this, right? And this may have more to do with Powell reaching some kind of agreement among the Hawks, because there are a few Hawks on the committee right now who are not so supportive of lowering rates further. We received this opposition from Schmid, Kansas City’s district chairman, in October.

01:05 Speaker B

He will probably oppose another cut at this meeting. Then on the downhill side, I would say Myron will be the opposition again, obviously in the dovish direction as he wants to cut faster. That’s what he’s been doing since he joined the FOMC.

01:18 Speaker B

And Schmid, of course, will probably oppose on the hawkish side, but I wouldn’t be surprised if you see another regional voting chair join Schmid this time because of the voters right now, Ghoulsby, Collins, oh Musalem, they’re all a little bit on the hawkish side right now.

01:38 Speaker B

Therefore, it will be a kind of balancing act for Powell to convince these people that it is right to continue reducing interest rates in this environment.

01:47 Speaker A

Stephen, they’re obviously having a hard time reaching agreement here. And I think people in your profession may also be having trouble grappling with the two sides of dual mandate. Is it an unusually difficult time right now to figure out which is more severe, inflation or the job market?

02:08 Speaker B

Like that. This is incredibly difficult because the economy is going through shocks, both fundamentally supply shocks, right? And the Fed usually takes supply shocks into account. So we are experiencing these changes in immigration policy on the labor side. This leads to less labor supply growth. We think that’s maybe at least a big reason why we’re seeing a slowdown in hiring. Now, of course, the unemployment rate has increased even more. There is also artificial intelligence to consider.

02:34 Speaker B

So, such supply-side shocks are happening. On the inflation front, there are tariffs, which are another type of supply shock. So you’re trying to parse this data and understand, yes, one, I

02:44 Speaker B

I don’t have real-time data initially due to the shutdown. I’m working with September data. But two of the data that I have, how much of this is demand driven, how much of this is supply driven, and then which one do I emphasize more, right? So this is a very challenging time because when you have these types of supply shocks, there is a risk of getting into some sort of stagflation scenario.

03:08 Speaker B

And with the Fed’s dual mandate of a stagflation scenario, it’s very difficult to figure out which of the two mandates you give more weight to. This is a period when it is difficult to reach consensus on this point. So it’s no surprise, I’d say we’ll see more opposition. We’ll probably see more dissidents next year.

03:26 Speaker B

It remains very difficult to direct policy and figure out what the right focus is for the Fed these days.