The Fed Submits?

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Federal Reserve officials are more optimistic about the growth outlook, less worried about unemployment, and just as worried about inflation as they were six months ago. Yet the median official now expects that short term interest rates “under appropriate monetary policy” will be lower than what was expected in June through at least 2027.For the most part, this shift cannot be explained by changes in the underlying economic data, to the extent that we have it. (While the statistical agencies will eventually catch up, the federal government shutdown has ensured that most of the numbers available as of this writing only run through September.) The more plausible explanation is that a small but growing cadre of Fed officials have been reinforcing the pressure from administration officials for larger and faster reductions in interest rates. Against them is a sizable contingent of Fed officials—consisting mainly of the reserve bank presidents, who are somewhat more insulated from Washington politics—that is resisting the attempt to suborn the central bank.So far, the latter camp has been fighting a rearguard action. The target band for short-term interest rates has already dropped by 0.75 percentage points just since September (to 3.5-3.75%), even though, as recently as July, traders had been betting against most, if not all, of those cuts, in line with what Fed officials had been saying.From this perspective, the apparent preferences of the median official may not be particularly helpful for anyone trying to understanding how Fed officials as a group will actually respond to ch…