The Federal Reserve has stolen the spotlight recently, despite the array of global events worthy of attention. Notably, Fed Governors Michelle Bowman and Christopher Waller have made headlines by advocating immediately for a cut in the Fed’s interest rate target. In his usual brazen manner, President Donald Trump, used a fresh string of colorful words to express his dissatisfaction with Fed Chair Jerome Powell. Powell seemingly prefers to analyze and base his decisions on data, rather than making impulsive moves.
Powell also presented his semi-annual Humphrey-Hawkins report to Congress over three days, enduring a flurry of aggressive inquiries from a plethora of senators and representatives. In an announced move, the Fed declared they would ease the reserve obligations that were imposed on big banks during the financial crisis of 2007-09. Fed Governor Michael Barr candidly stated that he predicts an inflation increase due to tariffs; therefore, he argued to maintain the current interest rates.
In front of Congress, Powell was compelled to justify the substantial cost overrun of the renovation of the Fed’s 90-year-old primary D.C. headquarters building. So, what conclusions can be drawn from these events? It’s essential first to understand that contrary to popular belief, the Fed Board Chair isn’t an authoritarian figure. They do not possess the power to single-handedly govern the money supply or interest rates.
Decisions regarding these crucial aspects fall under the purview of the 19-member Federal Open-Market Committee, which meets eight times annually. This committee comprises seven governors, who are appointed by presidents and confirmed by the Senate, and the presidents of the 12 Fed District Banks. These independently functioning banks, which are individual private corporations, hire their top executives without the interference of the president or Congress.
While all 19 members contribute to debates, only five out of the 12 district presidents have voting rights in a yearly rotation. For instance, Minneapolis Fed President Neel Kashkari will not vote this year but will do so in 2026 and 2029. When time for voting arrives, the vote is cast on a motion by the chair to either raise or lower the money supply, setting the next interest rate target.
Explicit disagreements often take a backseat, in an attempt to avoid causing market panic. This balancing act extends to meetups between the 12 district presidents, which are largely left to happen on chance, meant to prevent any behind-the-scenes coalitions. However, these members are frequent public speakers, subtly conveying their personal viewpoints in their speeches. If they happen to be voting members, they have the right to protest at any meeting.
Though, constant dissent can significantly diminish the value of one’s message. Case in point, Cleveland Fed Bank President Jerry Jordan. His frequent dissents during the 1990s led to his views being largely dismissed. Now, an unexpected development has surfaced. Governors Bowman and Waller have publicly expressed opposition to the chair. This phenomenon, while not unheard of, is quite unusual, especially just days following a meeting wherein everyone had agreed to keep the rates unchanged.
Regardless of their appointments by Trump during his first term, as was Powell, it’s plausible to assume that based on their origins, Bowman and Waller are critical of Trump’s governance style. Bowman, a Kansan, has a proven track record working as an aide for Sen. Bob Dole and had previously served as the commissioner of banking for her home state. Waller, who spent a decade as the research director at the St. Louis Fed, also has a well-established background.
Last week, however, Michael Barr stepped forward in disagreement with his colleagues. Over his illustrious career, Barr has been instrumental in the regulation of Wall Street following the financial catastrophe of 2007-09, much of which is currently under attack by the Trump administration and the Republicans. In contrast, the standing of Barr, a highly respected figure, sparks interest in the forthcoming FOMC meeting.
Yet, despite the tense environment akin to a Wild West standoff, it’s likely that the next FOMC gathering will be somewhat of a truce. Each side may engage in polite criticism, but the ‘rebels’ will likely retreat for now, hopeful to rally more support in the following meeting. The decision to adjust the rates will largely depend on the economic indicators available at the time such as the GDP numbers, monthly price indexes, and the labor market indicators.
Interestingly, Powell hinted at this during his Congress testimony, underscoring that the Fed doesn’t actually control interest rates, it merely influences them. It would be beneficial if Trump could grasp this nuance instead of constantly blaming Powell. Post-March 2020, following the diagnosis of the first COVID case in the U.S, the Fed attempted to tackle the crisis by unprecedentedly augmenting the M2 money supply.
By Biden’s inauguration, the M2 had risen by 25%, peaking at a whopping 40.6% in April 2022 – that’s more than the combined increase during the high-inflation Carter administration era. This instigated an inflation hike leading to rising consumer prices, thereby making a rocky start to the Biden term. Concurrently, few noticed the monetary expansion needed to maintain a steady “interest rate”.
In March 2022, in what was an evident tightening move, the Fed started to hike the ‘fed funds’ target to 5.5%, aiming for mid-2023. This was done by gradually cutting down the money supply until it was 34% higher than the pre-COVID level by November of that year. However, to prevent short-term rates from skyrocketing above its target, the Fed was compelled to pump up the money supply again, sequentially.
The consequence was an increased money supply, reaching 42% more than the pre-COVID level, despite the real output not even rising 14%. This stands as a ticking time bomb that could potentially lead to an inflation eruption, irrespective of tariff effects. Most overlooked the threat, unwittingly brewing an inflation explosion.
However, these monetary concerns aren’t the only matters keeping the Fed Chair occupied over the past week. The credibility and competence of the Biden administration remain questionable, as the results of their decisions continue to elicit skepticism, leaving us all to wonder how these changes will impact the economic landscape in the foreseeable future.