A July Rate Cut Could End Powell's Record-Breaking Fed Unity

(Bloomberg) -- Jerome Powell has faced the lowest number of dissents of any Federal Reserve chairman in 68 years. But that unity -- forged in the face of repeated attacks by President Donald Trump -- could splinter as he leads the central bank toward its first interest rate cut since 2008.

At least two Fed officials could dissent, or vote against the majority, at the July 30-31 meeting if Powell pushes for a rate reduction, as expected, according to economists. Their bets are on Kansas City Fed President Esther George and Boston Fed’s Eric Rosengren. Governor Randal Quarles is viewed as someone who might be inclined to join them, but probably won’t.

Two other regional Fed presidents, Atlanta’s Raphael Bostic and Richmond’s Thomas Barkin, said last week they’re skeptical of cutting rates because unemployment is low and the economy looks solid, reflecting deepening divisions among the 17 policy makers. Neither votes this year but will have an equal opportunity to voice their opinions during the meeting.

“Dissents marginally hurt the credibility and the message of the Fed,’’ said Michelle Meyer, Bank of America Merrill Lynch’s head of U.S. economics. “If the dissents prove persistent, the markets will start to doubt the Fed’s ability to conduct appropriate policy.’’

Since taking the Fed’s helm in February 2018, Powell has only suffered one no vote -- by St. Louis Fed President James Bullard who sought a quarter-point cut last month. That’s the smallest percentage of dissents under any Fed chief since Thomas McCabe led the central bank in 1948 to 1951. By contrast, 7% of votes dissented against Powell’s immediate predecessors Janet Yellen and Ben Bernanke.

Solidarity has probably been helped by Trump’s unprecedented public assault against the Fed over rate hikes last year. The president has even explored whether he could fire or demote the man he picked to lead the central bank, Bloomberg has reported. The simmering dispute may help to persuade any on-the-fence Fed voters to go along with Powell as a show of support for the Fed’s independence.

Investors have fully priced in a quarter-point cut later this month and the Fed chief reinforced those views with dovish remarks to Congress last week, citing rising global risks, persistently low inflation, and weakening business investment and manufacturing.

While dissenters aren’t likely to succeed in blocking a move, they could ensure any cut is only a quarter point -- rather than a half-point reduction that some people including Minneapolis Fed chief Neel Kashkari have argued for.

They could also cool expectations over further easing this year. There’s currently about 70 basis points of easing this year implied in interest-rate futures prices.

The Federal Open Market Committee’s policy statement, released at 2:00 p.m. on July 31, will give guidance on how officials view the outlook.

“We could see a hawkish cut: The FOMC would cut rates, but the statement would push back about the need for as many as three cuts by the end of this year,’’ said Sarah House, senior economist at Wells Fargo & Co.

George is viewed as the most likely dissenter, followed by Rosengren. Both former bank regulators have been worried periodically about financial stability risks.

She said Wednesday that strong consumer spending and employment reports back her forecasts for continuing growth, similar to June when the FOMC held rates steady.

“The real question for me is what will change in my outlook?” she said at the bank’s agricultural symposium. “To this point I don’t see anything.’’

George also cited the potential for imbalances when investors reach for yield. “You have to understand that can be a consequence of this policy,” she said.

The Fed’s monetary policy report July 5 noted growth in high-risk corporate loans, some with weak credit standards, and described asset prices as “somewhat elevated’’ in a number of markets.

Quarles last week said the U.S. has a “very strong economy” though with some risks, adding he wouldn’t predict the outcome of the July meeting. If Quarles were to dissent, it would be the first by a governor since Mark Olson in September 2005. In recent years, governors have felt institutional pressure to go along with the chairman even if they disagree.

At FOMC meetings, all participants get equal time even if they don’t vote that year. In June, eight of 17 FOMC participants projected lower rates this year in the “dot plot,’’ eight projected no change, and one a hike.

That indicates “a pretty split committee,” said Charles Plosser, retired president of the Philadelphia Fed, where he was a frequent voice of dissent. “No matter what the decision is there will be plenty of folks unhappy. I believe the Fed has put itself in a no-win position.”

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alister Bull

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