Federal Reserve Divisions Exposed as Powell Called to Keep Federal Funds Rate Unchanged, While Waller and Bowman Back July Rate Cut

TradingKey - On Monday, Federal Reserve Vice Chair for Supervision Michelle Bowman delivered a dovish message, citing potential risks in the labor market and expressing support for a rate cut as early as July if inflation remains under control. Last Friday, Fed Governor Christopher Waller also indicated his potential backing for a cut in July. 

Just a week prior, on June 18, Powell had announced a decision to keep the Federal Funds Rate unchanged, but the subsequent shift by two senior officials highlighted pre-existing divisions within the Fed. 

This development further fuels market speculation about a shift in rate policy: Has Trump's pressure finally taken effect? Is Powell losing his grip?

Fed Rejects Rate Cuts for Fourth Time Amid Growing Internal Discord

On June 18, Powell announced for the fourth consecutive time that the Federal Funds Rate would remain unchanged. However, the dot plot released that day revealed deepening internal disagreements. 

Deutsche Bank's Chief US Economist Matthew Luzzetti noted that the degree of discord within the Fed has reached a ten-year high, with forecasts for 2025 rates showing a polarized distribution. The gap between the most common and second-most common predictions is 50 basis points. 

Additionally, when weighted by the number of officials, this bifurcated distribution nears historical records, indicating a split into two camps within the Fed. 

The research suggests that such significant division could lead to more debates or even dissensions in the coming months, explaining Waller and Bowman's public support for a rate cut. However, it also highlights a strong consensus on the unemployment outlook, which might prevent further divergence in rate forecasts as economic data becomes clearer, potentially leading to a convergence of views.

Are Waller and Bowman Trump's Allies? Has His Pressure Worked?

Nick Timiraos notes in his article that Waller and Bowman, the first officials to publicly back a rate cut at the Fed's upcoming meeting at the end of July, were both appointed during Trump's first term. This might lead the market to perceive them as Trump's proxies. 

In recent weeks, Trump has intensified his public criticism of the Fed and Powell. On the eve of the rate announcement on the 18th, Trump called Powell "numbskull." 

Furthermore, Trump's "shadow chairman" threat looms. On June 6, Trump stated he would soon announce the next Fed chairman candidate. Bessent suggests that once Trump names an advance successor, Powell's statements may become irrelevant. Previously, Trump even threatened to fire Powell. 

Timiraos highlights that Trump's persistent pressure serves as a warning to Fed officials that they'll be held accountable if the economy falters. From this perspective, Waller and Bowman's initial support for a rate cut might be concrete evidence of Trump's pressure paying off. 

Mark Spindel, an investment manager involved in writing a historical account on Fed independence, commented, "Trump's criticisms are 'effective.' That's why he's doing it." 

However, Timiraos warns that if the Fed's independence is questioned, the efficacy of future monetary policy could be compromised. 

According to the CME Group's FedWatch tool, following Waller and Bowman's public support for a rate cut, market expectations for a Fed rate cut in 2025 have surged. The likelihood of a July rate cut now stands at nearly 23%, with a roughly 78% chance for September.