Is the Fed Flying Blind?

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. Good afternoon. On Wednesday, the Federal Open Market Committee voted to lower interest rates by a quarter percentage point, or 25 basis points. My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. This follows a cut of the same size at the Fed's September meeting, which was the first cut all year. Policymakers also announced plans to stop shrinking the size of the central bank's portfolio of securities starting on December 1st. The Fed's decision was in reaction to signs of a weakening labor market, even though stubborn inflation and declining consumer confidence still concern policymakers.

1:48Federal Reserve Chair Jerome Powell talked about the rationale for the cut at a news conference on Wednesday afternoon. Conditions in the labor market appear to be gradually cooling and inflation remains somewhat elevated. The October meeting comes in the midst of an ongoing White House push to pressure the Federal Reserve and its chairman to cut rates more aggressively. The latest criticism came Tuesday during President Trump's trip to Asia. I call him too late. He's always too late. He's been too late. And Jerome, too late Powell. The president also noted that Powell's term as chairman will soon come to a close in May.

2:26We got a bad Fed guy, but he'll be out of there a few months. Powell was able to keep the committee largely in lockstep this month. There were two dissents. Fed Governor Stephen Myron wanted to see a larger cut of 50 basis points. And Jeffrey Schmidt, who heads up the Kansas City Fed, was in favor of keeping rates steady. What happens at the next meeting in December and beyond is quickly becoming anyone's guess. In the committee's discussions at this meeting, there were strongly differing views about how to proceed in December. A further reduction in the policy rate at the December meeting is not a foregone conclusion.

3:03Far from it. Policy is not on a preset course.

3:27year into 2026.

3:35After Federal Reserve Chair Jerome Powell announced a cut of 25 basis points on Wednesday, I asked Bloomberg's Endicurin to break down what we know about the committee's decision making. Until around July part of this year, the Fed had thought the jobs market was doing well. They were more concerned about inflation. But in recent months, we've seen clear evidence that companies are hiring at a slower rate. And of course, at the same time, there are indications that inflation is perhaps headed in the right direction, not there yet, but headed in the right direction, giving a window for the Fed to cut.

4:07So that's why they went ahead with their move today to lower rates for the second decision in a row, reflecting their concerns now or more about the jobs market than inflation. Something else that's happened recently, the government has shut down. The Fed is not funded through congressional appropriations, so its staff are unaffected by the shutdown. But that doesn't mean the central bank is completely insulated from its effects. The Fed relies on data produced by agencies like the Bureau of Labor Statistics and the Bureau of Economic Analysis, whose staff have been furloughed. Bloomberg's Amara Amokwe says that's meant that key economic gauges and reports have come in late, or not at all.

4:45So I think Fed policymakers would have preferred to have more official government data. But what you heard a lot of them saying in the intermeeting period is that the data that they did have was still pointing in the same direction. And that direction was in one of a weaker labor market. And you didn't see Chair Powell or other policymakers pushing back against market expectations for a quarter point cut at this meeting. And so that basically signaled to people headed into the meeting that the Fed was going to be comfortable cutting here, that the level of concern about the labor market It has continued to rise.

5:19And you are seeing a group of policymakers expressing a little bit more comfort with the inflation outlook because some of the tariff pass-through has been less than initially feared. And because some do believe that sort of the underlying trend in inflation, when you strip out sort of the tariff effects, is lower. And so you saw Fed policymakers take all of that and say, OK, we feel comfortable cutting again. And absent all of the data that the Fed would usually have, what have policymakers been doing? So you've been listening to speeches and them in interviews. What are they kind of leaning on more so now that they don't have the full panoply of economic data from the government?

5:58So there are private sector gauges, gauges of consumer confidence, gauges of industrial activity, gauges of where the jobs market is at. There are those private sector indicators that the Fed is leaning on, which is useful. They did, of course, get all important inflation data last week, which was the one data release that the government effectively greenlighted. But they have been flying blind on the jobs market. I guess today's decision reflects the fact that for now they've concluded the market, the jobs market is weakening and that they need to move in advance of a weakening any further. But you have to say the longer this kind of data void continues, that decision will get more complicated because they simply won't know where the jobs market is at.

6:46Let's stick with those inflation data. So the BLS released the September CPI report a few days later than it was expecting to, brought people back to go through the data that had been collected. you look at CPI, excluding food and energy, which are known to be more volatile. And we saw the price of consumer goods had increased 0.2 % from the month before. A softer read than was expected by Wall Street and a lot of economists. Sounds like we have a good sense of what that means for this meeting, for the October meeting. Looking ahead to December, how did that kind of change the conversation that's taking place about the Fed's path forward?

7:18Well, so there's no doubt inflation came in a touch on the soft side in September. Remember, that does encourage, of course, policymakers that maybe they're headed in the right direction. But, you know, economists say plenty of caution around that number, David. For example, the big decline in rents, for example, is considered maybe to be a one-off, maybe some statistical noise there. Even though tariffs haven't passed through the way we might have expected, there certainly is some tariff impact in terms of tradable inflation. You look at furnishings, you look at apparel, by the way. So those kind of goods that are imported showing some price pressure there.

7:48And the point being that the end result is inflation remains around 3%. well above the Fed's 2 % target. So yes, you can say, okay, inflation's not coming in as bad as we might have expected, but it's nowhere near where the central bank needs it to be or wants it to be. And that's expected to be something of a complicating theme in the months ahead. And of course, it will be driven by the labor market. If there's a view for arguments like the labor market has stabilized, if we reach that point, given that some people blame it on the immigration crackdown anyway. So if you reach that point, then you might say inflation comes back into the story and the Fed goes on hold.

8:20But of course, we're at a point where the labor market continues to weaken and people are losing their jobs and let's just say inflation is where it's at, not getting any worse, well then at that point, the Fed will probably feel much more pressure to keep cutting rates rather than staying on hold. I think I can speak for Amira when we say we love hearing you say apparel and not apparel. All right.

8:41Amira, so as I said, we had workers come back to get this release together to put it out there, but we know from the White House, there's no data collection happening now. So tease out for us sort of what that means when we talk about flying blind, the prospect of there not being another CPI report on the heels of this. And what does that mean for the Fed? Yeah, that would be not great. And, you know, the White House has already signaled that we aren't going to get a repeat of that of the inflation release that we saw last week. And you heard Chair Powell talk about this earlier this month. He said, OK, we're fine for now.

9:11But if this goes on, then it becomes more challenging for policymakers to make their decisions in the absence of data. Right. They were already facing a very tricky policy landscape, as we've been discussing. There is a group of Fed policymakers that does have this heightened concern about the labor market. But there is another group that is still like, wait a minute, inflation is still a big problem. And without data to kind of inform them about how these factors are developing and evolving, it makes it very difficult for the Fed to calibrate its policy response correctly. And so if this goes on, the Fed could face a really challenging position at its December meeting and as we head into 2026.

9:55After the break, how the balance of power at the Fed could soon shift as Jay Powell's term comes to a close and who's on the short list to replace him.

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12:21The clock is ticking for Federal Reserve Chair Jerome Powell. After this month's meeting, there are only four more meetings left until he concludes his term as chair in May of 2026. Bloomberg's Amira Mokwe and Enda Curran say that looming above it all is the reality that President Trump and Treasury Secretary Scott Besant intend to name Powell's successor before his term is up. I asked them how that decision will affect Powell's ability to lead the Fed in the months ahead. He has until May. And of course, he could stay on as a governor on the Fed board. I look like any job, like any role, at some point, his power will start to wane.

12:58he will become something of a lame duck and you'd have to say the obvious moment for that might be when his successor is announced and the indications from president trump are that he might make that announcement before the end of the year and as soon as that happens a lot of focus will swing to that person's public commentary speeches interviews and everything else in terms of where the fed might be going forward in terms of policy but you know right here right now chairman powell still remains pretty much in control there's clearly a vibrant debate going on on the fed's policy board you can see that in the minutes and in the public speeches and everything else, but he seems to be steering it in the direction he wants.

13:32So I'd say right here, right now, David, his influence remains intact. But as I say, once his successor is appointed, you'll start to see some of that drain away. Amir, let's talk a bit about that process of picking a successor. So we learned from Treasury Secretary Scott Bessent, who's overseeing this search. There are five leading candidates here. So there's Chris Waller, current governor, Michelle Bowman, Kevin Warsh, Kevin Hassett, and Rick Reader, who's at BlackRock. So you've got some current Fed governors, a former Fed governor, somebody who's on Wall Street for good measure. What do you make of the list?

14:06I think it is actually a diverse set of candidates, right? We have Kevin Hassett, who is the current chair of the White House National Economic Council, which means he's one of Trump's top economic advisors, one of Trump's top allies. But you also have people like Chris Waller, who is viewed as sort of a more independent person. So while he was appointed to the Fed board by Trump, he is viewed as someone who is not willing to necessarily just go along with whatever Trump might want. Right. He has made a lot of credible calls on the economy over the years, and he's viewed as someone who would be inclined to continue to do that, but would also perhaps be open to some of the kinds of changes that you've heard President Trump and his allies talk about wanting at the Fed.

14:49Then you have Mickey Bowman, who is kind of an untraditional candidate. She comes from a banking background, also an appointee of Trump to the board, and is really seen as someone who in some ways is aligned with Trump, particularly on the regulatory front. And this year she has been in favor of rates. She was an earlier proponent of rates than many others on the Fed board. So she's kind of seen as aligned with Trump, but also having sort of this unique view and this unique background. There's also Kevin Warsh, who was a leading contender for the job back in 2017. but lost out to Powell. And in many ways, Walsh has aligned with the Trump administration.

15:25A lot of his critiques of the Fed are pretty much in lockstep with the critiques we've been hearing from Treasury Secretary Besant. And he is also a proponent of lower rates, which is likely to appeal to the president. And then Rick Reader, I think, is a little bit of a dark horse, kind of an unknown, a Wall Street guy. So yes, like a really, a really diverse slate of candidates, each with, I think, different kinds of expertise and backgrounds. And what's the status of this process? So we have this list, and I think we learned that Scott Besson, the Treasury Secretary, intends to give maybe a list of finalists to the president around the Thanksgiving holiday.

15:58What do we know about the president's level of engagement with this process and sort of what's going to be factoring into his thinking as he makes this election? Yeah, so we know the timeline is pretty much, as you mentioned, Dave, because both the president and Treasury Secretary said over the weekend that, roughly speaking, the shortlist will go to the president in and around Thanksgiving, and a decision will come at some point in the weeks after. We don't know too much in terms of what the president is thinking about the individuals, but we certainly know he's thinking a lot about the Fed. He's been posting on social media about it incessantly since we took office back in January.

16:27He's clearly of the view that interest rates need to be much lower. He's adamant that the Fed need to react and act on those views. He wants the next Fed chair to obviously share his worldview in terms of the economy and monetary policy. but the trick for the president will be to pull off appointing someone who he can be confident shares as I say his worldview which is that there's a case for lower interest rates without really spooking the markets because he will have to know that credibility is still critical for the Fed and of course we know President Trump is very cognizant of the market so it's going to be I think it's going to be a more tricky balancing act for him to pull off than he might himself think actually.

17:05Mary you've been looking at all of these individuals but at Chris Waller in particular you profiled him. Why did you decide to kind of dig into his biography and outlook? And what did you learn about how he might approach this job? Yeah. So we wanted to look at Chris Waller because of this question, right? If a person has an independent streak, if they are a person who believes in conducting credible economic analysis and making policy decisions based on what is in the best interest of the economy and not necessarily what the president says, how does someone like Chris Waller get the job? Can he get the job?

17:40How would he approach the job, right? Because he does have this reputation as being a tried and true economist. And what we learned from talking to his friends and associates is that, yes, right now he is in the camp of lower rates. But the way he got to that place was what they say is a credible analysis of the data. You know, he looked at the labor market and he said this is weakening. And he was the first among the Fed governors this year to say we should resume cutting because the labor market is showing these warning signs. And I think his associates, though, also say that he is not necessarily someone who's going to be committed to the status quo.

18:15And in reporting this story, we learned that in his role on the Fed right now, he oversees the 12 regional Fed banks, and he has really pushed for streamlining and cost cutting and even some staff cuts. So it's not the case that he would necessarily just continue to approach the Fed as it has been. He is open to some change, but that doesn't mean that he's necessarily going to go along with whatever President Trump says. And then let me play this out. So as you said, there's going to be a point at which Fed Chair Jerome Powell's influence begins to wane as we get to the end of his tenure. For a while, there's been this idea floated of there being a kind of shadow chair, that is, the president could pick somebody to be the next Fed chair.

18:55And that person, by opining on monetary policy and the role of the Fed could kind of confuse financial markets. Does it do something to kind of blunt the fear about having a shadow Fed chair if the president were to pick Chris Waller? I mean, you know, Waller is central casting macroeconomist. If he was to be appointed, it probably would offer something of a reassurance to investors who are nervous about where the Fed might be heading because ultimately he's grounded economics and that's what he is. And the significance he's given is that he will be willing to stand up to political pressure and be guided by data.

19:26If it's not someone like Waller, for example, then I think there would be a lot more scrutiny, a lot more focus on what that person is saying. Because if we get to the turn of the year, you know, you're four or five months out from Chairman Powell's term ending, naturally, a lot of the focus and interest will gravitate to whoever that next person coming in will be. Where are we in this conversation about the sanctity of Fed independence? How safe do experts think the kind of independence of the Fed is at this point in time? There's a big thing that we haven't talked about, which is the fact that President Trump is attempting to fire Fed Governor Lisa Cook.

19:58Right. And I think the outcome of that case, which now sits at the Supreme Court, is going to be ultimately the answer to that question about Fed independence. Right. So the Supreme Court denied the Trump administration's request to be able to remove Lisa Cook while this underlying case around an accusation of mortgage fraud plays out. and they're going to have hearings in January. So they kind of kicked the can down the road a little bit. So we have a little bit of a reprieve. But ultimately, whatever the Supreme Court says about this case is going to have huge implications for the question of the Fed's independence.

20:35Because if the president can remove a Fed governor while there's an underlying legal case playing out, that means that he has pretty wide latitude to remove a Fed governor. And the inability or the difficulty of removing a Fed governor has long been seen as the key protection for central bank independence. And so if that is somehow watered down, then I think it really does open the door for the president to have much more influence over the central bank.

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