【MACRO Alert】Federal Reserve's Policy Challenges in an Election Year — The Debate Over Interest Rate Cuts and Economic Data Considerations

As the U.S. election draws near, the Federal Reserve is facing unprecedented challenges. On the eve of the Jackson Hole central bank conference, Kansas City Fed Chairman Schmid expressed his cautious stance on interest rate cuts in an interview. Although he acknowledged that inflation is heading in the right direction, he believes the Federal Reserve should remain patient and see more economic data before making any interest rate cut decisions.

Schmid stated, “I think it's very necessary to look at some data in the coming weeks. Before we take action, at least before I take action or suggest taking action, I believe we need to see a little more data.” His remarks came after the release of the Federal Reserve's July meeting minutes, which showed that a “few” Federal Reserve officials thought it was reasonable to cut interest rates last month, while the “vast majority” believed it would be appropriate to start cutting rates at the next meeting in September. It is worth noting that Schmid does not have voting rights this year.

The U.S. Bureau of Labor Statistics' revised data shows that from April 2023 to March 2024, the U.S. economy added 818,000 fewer jobs than initially reported. This employment revision is the largest downward revision since 2009, meaning that the U.S. economy added 2.1 million jobs during this period, lower than the initially reported 2.9 million jobs. ING economist James Knightley pointed out, “This means that the U.S. labor market has further weakened on an already weak foundation.” Despite the large downward revision in employment data, Wall Street did not panic. Jamie Cox, Managing Partner at Harris Financial Group, said, “Although this number is shocking, job growth is still positive. If you support the view of interest rate cuts in September, this data almost determines that the Federal Reserve needs to cut interest rates.”

Yardeni Research stated that the downward revision of employment data is another sign that the labor market is returning to the trend before the COVID-19 pandemic, when an average of 175,000 jobs were added per month. The organization also emphasized that the report used by the Bureau of Labor Statistics for data revision excluded immigrants, and the trend of immigration in recent years has helped drive employment market growth. He added that this data is “already old news,” and employment data has been performing well since March, despite some fluctuations in July. They expect the non-farm employment report for August to rebound after the data in July declined due to Hurricane Barry.

Adam Posen, President of the Peterson Institute for International Economics, emphasized in a recent article that Federal Reserve Chairman Jerome Powell needs to make it clear that the Federal Reserve's monetary policy stance may be reversed after the election, and he should publicly discuss the basic facts of economic policy while avoiding mentioning any competing political parties and candidates. Posen pointed out that the uncertainty during the election period poses a challenge to the independence of the central bank and policy formulation.

As the next government's economic policy direction is unpredictable, the Federal Reserve must consider the potential impact of election results when formulating monetary policy. The market widely expects the Federal Reserve to enter an interest rate cut cycle in September 2024, indicating that any sudden policy shift could have a destructive impact on the market. Against this backdrop, Boston Fed Chairman Collins and Philadelphia Fed Chairman Harker both stated that they believe it is appropriate for the Federal Reserve to start cutting interest rates soon, and the pace of rate cuts should be “gradual” and “orderly.”

However, Kansas City Fed Chairman Schmid holds a different opinion, emphasizing the need to see more economic data before taking any action. Recently released data shows that the U.S. economy is still in good shape overall. Inflation has clearly decreased, and although the unemployment rate is rising, it is still at a historical low. These data provide a reference for the Federal Reserve when considering interest rate cuts. However, Schmid's view reminds us that the volatility and uncertainty of economic data require the Federal Reserve to remain cautious when making decisions.

When formulating monetary policy, the Federal Reserve must consider multiple factors of politics, economy, and society while maintaining its independence. As the election approaches and economic data continue to change, the Federal Reserve's policy decisions will become more critical and urgent. Posen's view emphasizes the complexity and challenges that the Federal Reserve needs to consider when formulating policies, while Collins and Harker's remarks indicate that there are different views within the Federal Reserve on when and how to start interest rate cuts. In this process, the Federal Reserve's communication strategy and market expectation management will be crucial.

As the U.S. election approaches, the Federal Reserve faces complex challenges in formulating monetary policy. Kansas City Fed Chairman Schmid emphasizes the importance of needing more economic data before making interest rate cut decisions, while Boston Fed Chairman Collins and Philadelphia Fed Chairman Harker believe that interest rate cuts should start as soon as possible. Adam Posen, President of the Peterson Institute for International Economics, points out that Federal Reserve Chairman Jerome Powell needs to clearly express that the monetary policy stance may need to be adjusted after the election, and publicly discuss the basic facts of economic policy without involving political parties and candidates. The Federal Reserve must consider multiple factors of politics, economy, and society while maintaining its independence to cope with the potential impact of election results and manage market expectations to ensure a smooth policy transition.