Fed Officials Still Lean Against Near-Term Rate Cuts Despite Job Losses…

By Steven K. Beckner

(MaceNews) – Until very recently, it had become all but a foregone conclusion that the Federal Reserve would leave short-term interest rates unchanged at its mid-March meeting, and even beyond that there was little indication of a consensus for the resumption of rate cuts until later in the year.

In the face of a surprisingly weak February employment report and the imponderable economic consequences of the expanding war against Iran, the outlook for monetary policy has become far more uncertain in the waning weeks of the Powell Fed. But with a few notable exceptions there is little support among Fed officials for a return to monetary easing in the near future.

Notwithstanding the big dip in February payrolls, other readings, including from the Fed’s own “beige book” survey, reflect more resilience in the economy and inflation continues to run closer to 3% than to the Fed’s 2% target.

So, the Fed’s policy-making Federal Open Market Committee still seems highly likely to delay additional rate cuts at its March 17-18 meeting.  The outcome of the April 28-29 and subsequent FOMC meetings is less obvious, but official comments suggest it will take more evidence of labor market softening to hasten rate cuts.

As always, officials universally say they will be guided by the data and how they affect the balance of risks, but the fact is there are predispositions — varying degrees of openness to providing more monetary stimulus. The way it currently breaks down, a few Fed officials remain outspokenly in favor of further rate cuts; some are adamantly opposed, and others are open to additional easing but only down the road and only when they become convinced that inflation is headed down to the Fed’s 2% target.

FOMC participants will be compiling a new Summary of Economic Projections (SEP) at the March 17-18 meeting, including a new “dot plot” of funds rate projections, and judging from recent comments it seems questionable whether the amount of expected rate cuts will increase much.

The timing of eventual rate cuts is as uncertain as the outlook, but it’s worth noting that over the years, September FOMC meetings have often been the time for major policy moves.

President Trump has formally nominated former Fed Governor Kevin Warsh to succeed Jerome Powell when his term as chair ends on May 15, but while Trump clearly hopes Warsh will slash rates that may not eventuate.

Already uncertain policy prospects were further clouded , in the minds of Fed officials, by the U.S.-Israeli attack on Iran and its potential economic repercussions. In particular, spiking energy costs, while nowhere near the magnitude of those that occurred in previous Middle East conflicts, stand to work deleteriously on both sides of the Fed’s dual mandate — increasing price pressures while also exerting contractionary effects on economic activity.

Now, a shocking reversal of job gains, reported Friday morning, has added to uncertainty, but this does not seem to have measurably increased the impetus for easing.

The weak jobs report did not seem to change the view of Cleveland Federal Reserve Bank President Beth Hammack. Given what she sees as excessive inflation, the FOMC voter said she still believes monetary policy “should be on hold for quite some time as we see evidence that inflation is coming down and the labor market stabilizes further.”

Though known as less “hawkish” than Hammack, San Francisco Fed President Mary Daly did not seem much more open to rate cuts after the employment report was released.  While she expressed concern about the reappearance of weakness in the labor market, she said the FOMC should not be too quick to react, because there are also upside risks to inflation.

Boston Fed President Susan Collins reacted to the employment report by saying she still has a “fairly benign” economic outlook and called for “maintaining policy rates at their current, mildly restrictive levels for some time.”

Before the employment report, other officials, including FOMC Vice Chairman and New York Fed President John Williams, Richmond Fed President Tom Barkin, Minneapolis Fed President Neel Kashkari, Philadelphia Fed President Anna Paulson and Kansas City Fed President Jeff Schmid came down largely in favor of an indefinite pause.

A notable exception was Governor Stephen Miran. Who has repeatedly dissented in favor of more aggressive rate cutting.

After cutting the funds rate by 75 basis points in the last four months of 2025, and 175 basis points since September 2024, the FOMC left that policy rate in a target range of 3.5% to 3.75% on Jan. 28. Miran joined Gov. Christopher Waller by dissenting in favor of another 25 basis point cut.

In their last SEP, published Dec. 10, the 19 FOMC participants anticipated just one 25 basis point rate cut in 2026. Some officials wanted more rate cuts; others wanted none.

The last rate cut on Dec. 10 left the median funds rate of 3.6% 60 basis points above the Committee’s 3.0% estimate of the “longer run” or “neutral” rate, causing Bowman, Miran and Waller to argue for more rate cuts on the grounds that the funds rate remains too restrictive relative to that “neutral” rate.

Minutes of the late January FOMC meeting showed a strong majority of participants wanting to focus primarily on curbing inflation, not boosting employment.

Notwithstanding its frequent emphasis on lowering inflation, unemployment is a major focus for monetary policymakers, and they got a rude awakening Friday morning from the Labor Department. Its February employment report showed that non-farm payrolls fell by 92,000 in February, instead of rising by 55,000 as expected. What’s more prior months’ payrolls were revised down. The unemployment rate ticked up from 4.3% to 4.4%.

The report came as an even more unpleasant surprise because it had been preceded by upbeat reports on private hiring and job cuts from ADP and Challenger, Gray & Christmas.

Hammack did not let the weak job numbers change her stand pat policy prescription in a Friday speech.

“We have a dual mandate, and we need to balance elevated inflation against the labor market softening we’ve seen over the last year,” she said. “Given this combination and recent rate reductions, I believe policy is in a good position.”

“The fed funds rate is around neutral, which allows us to see how things are going to play out,” Hammack continued in remarks to the University of Chicago Booth School of Business’s to :2026 US Monetary Policy Forum. “Under my base case, I think policy should be on hold for quite some time as we see evidence that inflation is coming down and the labor market stabilizes further.”

Hammack’s remarks were primarily devoted to the international status of the U.S. dollar, and while acknowledging that the dollar is primarily the province of the U.S. Treasury she said the recently embattled dollar is “one of many factors affecting the economy, so it’s something I’m watching.”

“Delivering on our commitments is an important way the Federal Reserve helps ensure the dollar remains a reliable store of value and that Americans continue to reap benefits from its global status,” she went on. “This includes bringing inflation back to our 2% goal, sustaining a healthy labor market, and supporting a resilient financial system. High inflation erodes the purchasing power of dollar cash holdings and nominal bonds.”

“Currently, US inflation is too high and has been above our objective for the past five years,” Hammack added.

Reacting to last month’s job numbers earlier Friday, Daly said they “got her attention” because they showed the economy remains vulnerable to “two-sided risks” to the Fed’s dual mandate (downside risks to employment along with upside risks to inflation).

The report complicates the FOMC’s task because “we have inflation printing above target,” she said. “It’s been printing above target for some time, so it’s really a balance of risks calculation.”

Daly said she “hope(s) the 75 basis points we did last year would put a floor underneath the labor market,” but added, “we don’t have any evidence that it’s quite steady.”

Nevertheless, the FOMC should not rush to lower rates to boost jobs, she said. Rather, the best “policy alternative….is to hold them steady while we collect more information…We need more time. “

Collins, who also spoke after the release of the February employment report, sounded largely unmoved.

“Monetary policy should be based on an assessment of where the economy is heading, and based on my outlook I see a patient, deliberate approach as appropriate,” she told the Springfield, Massachusetts, Regional Chamber.

“My baseline features a still-uncertain inflation picture, with continued upside risks,” she continued. “This, combined with recent evidence suggesting a relatively stable labor market, in my view argues for maintaining policy rates at their current, mildly restrictive levels for some time.”

Collins added that she does “not see an urgency for additional policy adjustments, and I will be looking for clear evidence that inflation is moving durably toward the 2% target – something that might occur only over the second half of the year.”

Elaborating, she said, “Though considerable economic uncertainty remains, exacerbated by recent geopolitical developments like the hostilities in the Middle East, my baseline outlook is fairly benign – featuring continued solid economic growth, relatively balanced labor market conditions, and disinflation resuming later this year as tariff effects fade.”

Collins enumerated a number of “reasons to expect continued solid growth” and said past labor market “softening” reflects decreases in both labor demand and labor supply. She said “the sharp immigration slowdown implies that a slower net pace of job creation is now needed to keep the labor market relatively well balanced.” She said “labor replacement” as firms implement productivity measures may limit hiring.

She expressed greater concern about “elevated” inflation. “While down from the earlier peak, it was the same as in December 2024 and still a full percentage point above the FOMC’s 2% inflation target,” she said, adding, “Returning the inflation rate to target will not, of course, reduce the price level, but it is essential for restoring the steady, predictable pricing environment that is conducive to a vibrant economy that works for everyone.”

Those latest comments came on the heels of a Labor Department report showing that non-farm payrolls fell by 92,000 in February, instead of rising by 55,000 as expected. What’s more prior months’ payrolls were revised down. The unemployment rate ticked up from 4.3% to 4.4%.

The report came as an even more unpleasant surprise because it had been preceded by upbeat reports on private hiring and job cuts from ADP and Challenger, Gray & Christmas.

The payroll dip also seemed less buoyant than the findings of the “beige book” survey of economic conditions around the nation, whose mixed findings will be reviewed at the FOMC meeting, did not, in itself, make a conclusive monetary policy case.

On one hand, it found “a slight to moderate pace” in seven of the 12 Fed districts, while the number of Districts reporting “flat or declining activity” increased from four to five.

As for the labor market, the survey found that “employment levels were generally stable,” with seven of 12 districts reporting “no change in hiring.” But “contacts in several districts cited rising non-labor input costs, softer demand, or uncertainty about overall economic conditions as reasons for flat or lower employment levels.”

Leading up the employment report, Trump appointee Miran continued his push for further rate cuts, saying that higher oil prices due to the Iran conflict “will feed into ‌headline inflation, but the evidence that it feeds into core inflation … is quite limited.”

“It is difficult for me to get very excited about a policy implication of what’s happened so far,” Miran said, adding that the Fed should not ignore the “two plus years of a trend of gradually weakening labor markets.”

“There is still evidence to me that it needs support from monetary policy,” Miran declared.

But other officials were far more reluctant to resume cutting rates, led by Williams, who echoed Powell Tuesday by saying, “Monetary policy is currently well positioned to support the stabilization of the labor market and return inflation to our 2% goal.”

The FOMC Vice Chairman did allow, conditionally, for more rate cuts at some point: “Looking further ahead, if inflation follows the path I expect, further reductions in the federal funds rate will eventually be warranted to prevent monetary policy from inadvertently becoming more restrictive.”

But he seemed to be in no hurry to reduce the funds rate. Despite “a gradual softening of the labor market through much of the year (2025),” he said “in recent months, however, there have been promising signs of stabilization.” (Again, he was speaking prior to the February employment report).

Williams pointed to the New York Fed’s Labor Market Tightness Index, which measures how difficult it is for firms to find workers, which he said has “stabilized in recent months.”

At the same time, he was more sanguine than some of his colleagues about the inflation outlook: “Given the lack of second-round effects and well-anchored inflation expectations, I expect the tariffs largely to have one-off effects on prices. Therefore, I anticipate inflation to start coming back down later this year when the peak effect of tariffs on the inflation rate is behind us.”

With the FOMC’s 175 basis points of easing, “the risks to achieving our maximum employment and price stability goals are now in better balance,” Williams said. “I expect real GDP to grow about 2-1/2 percent this year, supported by stimulus from fiscal policy, favorable financial conditions, and robust investments in artificial intelligence.”

“With real GDP poised for continued solid growth, I expect the unemployment rate to edge down over the course of this year and next year,” he continued. “And with the effects of tariffs on inflation waning later in the year, I expect overall inflation to come in at around 2-1/2 percent in 2026, then fall to 2 percent in 2027.”

Kashkari, who had previously projected at least one 25 basis point rate cut this year, said Tuesday he now thinks the FOMC needs to hold fire until the economic fall-out from the Iran war, particularly with regard to inflation, becomes more clear.

After coming into the year optimistic, the FOMC voter said that now “we need to see with this new shock, potentially a new shock hitting the global economy…how long is the effect, and how big is the effect?”

“The question I think that we are wrestling with, and markets are wrestling with, is, how long is this going to last? How bad is ‌it going to get? Is it going to look ⁠more like Russia-Ukraine, or is it going to look more like Hamas attacking Israel, and that’s going to have effects on monetary policy,” Kashkari said at a Bloomberg event.

“If headline inflation is going to be elevated for an extended period of time, coming off of five years of elevated inflation, boy, that’s a…scenario that we need to pay close attention to,” he said.

Before the outbreak of war, Kashkair said he had “felt like policy was in a pretty good place and we have the luxury of just letting it gradually ‌glide back to neutral.”

Meanwhile, Schmid continued his hard-line opposition to rate cuts Tuesday, saying, “Overall, with inflation still running hot, it appears that demand is outpacing supply across much of the economy.”

“I remain open to the possibility, and I’m even optimistic, that AI and other innovations will eventually lead to a non-inflationary, supply-driven growth cycle….,” he continued. “However, based on the current rate of inflation, we are not there yet.”

The chorus of going slow on easing was joined by Barkin, who said Thursday that the forces which impelled the FOMC to cut the funds rate by 75 basis points in the last three meetings of 2025 are now moving “in the other direction,”

“With the PCE numbers that we’re expecting next week, you’ve got a couple months ‌of relatively high inflation,” he said on Bloomberg TV. “That certainly puts pause to any conclusion that we’re done ‌fighting this.”