Fed Unity Is Showing Cracks at a Critical Time

Disagreement is bubbling up at the Federal Reserve as dueling growth and inflation risks pull policymakers in different directions. If you think the debate seems fiery now, just wait until the third quarter, when recession may be at the nation’s doorstep.

Last week offered a taste of the brewing divisions. On Tuesday, Federal Reserve Bank of Chicago President Austan Goolsbee, a dovish first-time voter on the rate-setting committee this year, called for “caution and watchfulness and prudence” in monetary policy after the failure of two banks in what seemed like an implicit endorsement of a pause to rate increases. As he put it:

Given how uncertainty abounds [about where] these financial headwinds are going, I guess I think we need to be cautious. We should gather further data and we should be extra careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting inflation down.

A few days later, Fed Governor Christopher Waller delivered a speech emphasizing how rates had to go higher because inflation “is still much too high.” Here’s Waller:

Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, monetary policy needs to be tightened further. How much further will depend on incoming data on inflation, the real economy, and the extent of these tightening credit conditions.