Powell's Silent Crisis: Growing Divisions Within the Federal Reserve

Author: Anthony Pompliano, Founder and CEO of Professional Capital Management; Translated by: Shaw Jinse Finance

The Federal Reserve and its Board of Governors have historically been accustomed to discussing policy decisions behind closed doors, but when they regularly vote on monetary policy, they almost always maintain a unified stance. This is why the simultaneous dissenting votes by two Federal Reserve governors in July of this year caused such a stir.

At the same meeting, not one, but two governors voted against the proposal. This is a rare and unusual occurrence, as we haven't seen two Federal Reserve governors vote against a proposal at the same meeting since 1993. At the time, most people believed this anomaly was politically motivated. Federal Reserve Chairman Jerome Powell seemed to dislike Donald Trump, and both governors who voted against the proposal were Trump nominees. The Federal Reserve is supposed to remain independent, but if you think that, I can only say you're being naive. The Federal Reserve is made up of people, and people are biased. This bias may not manifest itself in a malicious or insidious way, but everyone is influenced by their personal beliefs. That's human nature. No one, not even a central bank, is immune. But the information we have now suggests that the dissenting opinions of those two Fed governors in July may be foreshadowing future developments. Bloomberg's Catarina Saraiva published an article over the weekend titled "Fed Watchers Focus on Vote Counts as December Rates Uncertainty Rises." In the article, she wrote: "In recent weeks, divisions within the Federal Reserve have intensified, with officials holding differing opinions ahead of the December policy meeting, while Chairman Jerome Powell remained silent. On Friday, a dramatic turn of events occurred. New York Fed President John Williams (sometimes seen as a mouthpiece for the Fed chairman) expressed support for a rate cut, after several policymakers had previously leaned against it. Powell himself has not publicly commented since the Fed's last interest rate decision on October 29. However, a review of recent statements shows that the other voting members of the Federal Open Market Committee are now almost evenly divided on interest rate decisions, making it almost certain that someone will vote against the decision on December 10, regardless of the outcome." These dissents are significant because they expose the fragility of the central bank system. You can view the persistent dissent among Federal Reserve governors as a very negative sign. There is no consensus, and no calm. These dissents also highlight the difficulty and complexity of the current economic environment. The recent divergence has become increasingly apparent. Chairman Powell had been adept at fostering consensus throughout his tenure, but now all that is changing. This situation reminds me of the book *The King of Loose Monetary Policy*, which provides the best analysis of the Federal Reserve's actions during the global financial crisis. This book is important because it articulates what many people dare not say publicly: The Federal Reserve may have done more harm than good to the U.S. economy over the past 20 years. The book's synopsis states: "If you ask most people what force led to the unprecedented income inequality and financial crisis we see today, no one will say the Federal Reserve. For most of its history, the Fed has been flattered and lauded by the media. During economic booms, credit goes to the Fed; during the 2008 crash, the Fed is praised for saving us. But here, for the first time, the inside story of how the Fed allowed the US economy to deteriorate is revealed… 'The King of Easing Money' cleverly tells the story of how quantitative easing jeopardized the US economy through the tale of a man who once tried to warn us." This man was Thomas Hoenig, who, in hindsight, appeared remarkably wise. So what exactly did Hoenig do? His achievements can be summarized as follows: Following the 2007 recession, Honnig frequently commented on the financial crisis and its causes, as well as regulatory reforms and monetary policy to address it, thus becoming a focus of national attention. At all eight Federal Open Market Committee (FOMC) meetings in 2010, he cast the sole dissenting vote against the FOMC's accommodative monetary policy and expressed concern about the FOMC's commitment to keeping the federal funds rate at historically low levels for an "extended period." He also frequently spoke publicly about large and systemically important financial institutions, the so-called "too big to fail" companies. He stated that the negligence and mismanagement of these companies were the main causes of the crisis. In hindsight, it's hard to say Honnig was wrong. I suspect the others present also disagreed with the decision, but they chose loyalty to the Federal Reserve over loyalty to the American people. Now, it seems very few Fed officials are willing to repeat that mistake. If the Fed had held a monetary policy vote today instead of December 10th, Jim Bianco believes the vote would have been 7-5, with a higher percentage in favor of another rate cut. Market estimates of a 63% probability of a December rate cut also support this view. Even Polymarket currently believes there's a 95% probability of a 25 basis point rate cut in December. However, this rate cut decision won't be released for another four weeks. The vote won't take place today; we have to wait until December 10th. In financial markets, that's a long time. Data changes, market sentiment changes, and opinions change. So, you can't expect today's information to guarantee the final outcome. However, one thing is changing: the financial situation for ordinary Americans. They are in a tough spot and desperately want relief. While interest rate cuts might help in some cases, they could cause more pain in others. NBC News' Kristen Welker asked Treasury Secretary Scott Bessant yesterday, "How much longer do Americans have to wait? How much longer will they have to wait for the cost of living to come down?" Bessant shared his thoughts. He said: "I talked about the three biggest factors hurting Americans: immigration, interest rates, and inflation. The president closed the borders, and the massive influx of immigrants has stopped. Previously, large numbers of immigrants had driven up housing prices and depressed wages. Interest rates have fallen… therefore, prices are starting to fall across the board. Thanksgiving is coming, and this year's Thanksgiving dinner will be the cheapest in four years. Turkey prices are down 16%." This ultimately boils down to the challenges of managing the economy. The Federal Reserve is gradually lowering interest rates, while the Treasury Secretary and economic policy advisors in the Trump administration are trying to address affordability issues nationwide. You can think of the Federal Reserve as trying to leverage short-term liquidity, while the rest of the government is trying to leverage long-term liquidity. While not a perfect analogy, it's closer to reality than people imagine. These problems will never have perfect solutions. The global economy is a complex machine. No one can agree on what the data reveals, let alone how various decisions will affect the economy. Today, **political, monetary, and economic decisions are all intertwined.** All eyes are on the Federal Reserve's December rate cut decision. I estimate the Fed will cut rates by another 25 basis points. However, I don't entirely agree with this decision. I've been favoring a 50 basis point cut this year so we can bring the cost of capital below 3% as quickly as possible. This should ease the burden on ordinary households, incentivize R&D investment, and drive more significant GDP growth. I think the chances of a 50-basis-point rate cut are extremely slim, especially given the Fed's lack of recent Bureau of Labor Statistics data; they're essentially groping in the dark. So they'll likely back down and continue to slowly lower the federal funds rate. But if for some reason they don't cut rates, Wall Street will be in chaos, and the market will fall. The general consensus is that we need cheaper money, so the Fed should act. And market chaos is a risk that Jerome Powell and the Fed are unwilling to take.