Former Cleveland Fed President Mester: The Fed should be waiting right now
Former Cleveland Fed President Loretta Mester joins 'Squawk Box' to discuss the challenges facing the Federal Reserve, state of the economy, rate path outlook, and more.
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Yahoo
34 minutes ago
- Yahoo
Forget about the Fed's dual mandate—this investment advisor says they've added a third mandate, and won't be cutting rates anytime soon
After running interest rates near zero for a decade and a half, the Federal Reserve has turned cautious and is unlikely to cut anytime soon, according to Jeff Klingelhofer, a managing director and portfolio manager for Aristotle Pacific Capital. That's because the central bank is concerned about social stability and inequality following its brush with record-high inflation—and low rates make inequality worse. Most everyone knows about the Federal Reserve's dual mandate. Set by Congress, the charge for the U.S. central bank is twofold: Create the conditions for stable prices (i.e., low inflation) and maximum employment. (The third mandate—to moderate long-term interest rates—flows naturally out of keeping inflation steady.) Increasingly, though, the third mandate is changing, according to Jeff Klingelhofer, a managing director and portfolio manager for Aristotle Pacific Capital, an investment advisory. And that new task is social cohesion. It's a tough call for an entity that has seemed somewhat battered in recent years, bruised by its failure to catch COVID-era inflation in time and, increasingly, in a fight with the president of the United States, who is pressing on the Fed's nominally independent head to lower interest rates. 'It's out with the old—financial stability—and in with the new: social stability,' Klingelhofer told Fortune. Klingelhofer notes that, before the 2007–2009 Global Financial Crisis, the Fed used to be very proactive in raising interest rates, hiking them well before any sign of inflation. Post-crisis, when unemployment was stubbornly slow to fall, critics accused the Fed of hiking rates too quickly and stymieing the recovery. (The Fed's first rate cut came in late 2015, with unemployment at 5% and the Fed's preferred measure of inflation at just 1%.) Inflation didn't come close to hitting the Fed's 2% target for seven years after the hike. Years later, two Fed governors admitted they got the balance wrong and should have kept rates lower for longer. In 2020, that shifted. The Fed, by keeping rates low, 'learned the biggest wage gains went to the lowest earners,' Klingelhofer said. 'Coming out of COVID, the third mandate was social stability, compression of the wage gap.' But the central bank also got burned with its prediction that inflation would be 'transitory.' That miss, coupled with the fastest and steepest rate-hiking cycle in modern history, has made the central bank loath to move too quickly on cutting rates this time. This shift is evident in the tenor of Chair Jerome Powell's speeches, starting at Jackson Hole, Wyo., in 2022. 'Without price stability, the economy does not work for anyone,' Powell said in 2022, adding that the Fed was 'taking forceful and rapid steps to moderate demand…and to keep inflation expectations anchored.' 'We will keep at it until we are confident the job is done,' he said. That experience has pushed the Fed from proactive to reactive, Klingelhofer said. 'They'll need to see inflation below 2%, and think it'll stay there.' If a recession hits, 'I don't think the Fed will step in as they have in the past,' he added. 'Maybe if it's a deep recession, with high unemployment, and inflation falls below 2% dramatically—maybe.' Historically low interest rates had another effect—they redistributed wealth upward by encouraging asset bubbles. In this way, as a recent body of economic research has shown, low rates have contributed to skyrocketing wealth inequality. Low interest rates tend to juice stock-market appreciation, benefiting the 10% of the population that owns more than 90% of stock, and encourage investors to create novel assets as they chase bigger returns. These benefits accrue most to those who have the biggest financial assets—i.e., the wealthiest—while doing little for the poor. And while low rates encourage higher employment, 'the 1% of Americans who own 40% of all the assets just get tremendous gains before that first job is created for the middle class,' said Christopher Leonard, who criticized the Fed's ultra-low-rate policies in The Lords of Easy Money, a 2022 book describing this dynamic. In this way, he said, the Fed exacerbates the gap between the ultrarich and the rest of us, which he called 'the defining economic dysfunction of our time.' It's another argument against cutting rates, in addition to the risk of reigniting inflation—whose burdens, as Powell repeatedly notes, '[fall] heaviest on those who are least able to bear them.' 'The alchemy of low interest rates is over,' Klingelhofer says. He isn't convinced the Fed has that much influence on rates like the 10-year Treasury, which closely influences mortgage rates. These bonds trade in international markets where investors buy or sell them based on how they perceive the risks of U.S. debt. 'Where should 10-year Treasuries be? With inflation at 3%, and the government running 6%–7% deficits, 4.5% feels roughly correct,' he said. In fact, some economists say the Fed cutting rates would be perceived as a recession indicator—and would have the opposite effect, sending bond yields and interest rates soaring. As Redfin economics research head Chen Zhao told Fortune previously, 'the Fed only controls that one Fed funds rate. Everything else is determined by markets.' This story was originally featured on
Bloomberg
an hour ago
- Bloomberg
Bessent Emerges as Possible Contender to Succeed Fed's Powell
A growing chorus of advisers inside and outside the Trump administration are pushing another name to serve as the next chair of the Federal Reserve: Treasury Secretary Scott Bessent. President Donald Trump said Friday he would name a successor ' very soon ' to replace Jerome Powell, whose term as Fed chair ends in May 2026. The small list of candidates under consideration has included Kevin Warsh, a former Fed official whom Trump interviewed for the Treasury secretary role in November, according to people familiar with the matter.
Miami Herald
an hour ago
- Miami Herald
Billionaire fund manager sends strong message on Fed Chair Powell's future
The Federal Reserve is in a bind, which has put its Chairman, Jerome Powell, on the defensive. Powell cut rates last year to shore up the jobs market, but he's since paused additional rate cuts because of uncertainty over the impact of tariffs. Many, including President Trump, think this is a big mistake, arguing that hesitation on lowering the Fed Funds Rate, a benchmark used to set rates on everything from cars to mortgages, risks stagflation or recession. The risk that higher rates contribute to a slowing economy is real. Still, the impact of tariffs on inflation has yet to be fully felt, and cutting rates could send inflation skyrocketing, pressuring consumers and businesses further. Related: Legendary fund manager sends blunt 6-word message on bitcoin Powell's decision to remain on the sidelines despite the President's comments regarding Powell's future has caught the attention of major market participants, including billionaire fund manager Ken Fisher. Fisher is the founder of Fisher Investments, which has $295 billion in assets under management. He's been navigating the markets since the 1970s, and he's seen his share of economic and market booms and busts. This week, Fisher weighed in on the prospect of Powell's removal, offering a candid take on what's likely to happen to him. Image source:The Federal Reserve has a tough job. Its dual mandate is to set interest rates at levels that ensure low unemployment and inflation, two often contrasting goals. When the Fed cuts interest rates, it fuels economic activity, creating jobs but increasing inflation. When it raises rates, it crimps GDP, lowering inflation but causing unemployment. Related: Looming inflation data may rock interest rate cut forecasts We've seen this relationship play out since Covid. In 2022, the Fed switched gears away from zero-interest rate policy, or ZIRP, embarking on the most hawkish pace of rate hikes since the 1980s to fight runaway inflation caused by stimulus payments. Those rate hikes slowed inflation, driving it below 3% from above 8% in 2022, but they also caused job losses to increase. The unemployment rate has climbed to 4.2% from a low of 3.4% in 2023. The weakening in the jobs market and confidence that inflation would continue to fall prompted the Fed to change policy again late last year, cutting rates in September, November, and December. Many market watchers and economists expected those cuts to continue in 2025; however, that hasn't happened as inflation has proven stickier than hoped. In April, the Consumer Price Index, or CPI, was 2.3%, about in line with its 2.4% reading last September. The risk of inflation reasserting itself worsened in February, when President Trump announced 25% tariffs on Mexico and Canada and 20% tariffs on China. It worsened even more in April when the President announced harsher-than-expected reciprocal tariffs, including a 10% baseline tariff on all imports. While the White House has paused implementing most tariffs announced in early April, many tariffs remain in effect, including those on Canada and Mexico and a 25% tariff on autos. Meanwhile, the China tariffs, while lower than their peak, have increased to 34%, and the baseline tariff remains active. The uncertain inflation picture is keeping Fed Chair Powell from reducing rates, even as job losses continue and signals of a weak economy mount. The ISM Manufacturing PMI, a measure of manufacturing activity, was 48.5 in May, below the 50 level associated with growth. The Conference Board's consumer expectations index was 72.8 in April, below the 80 threshold that typically signals a forthcoming recession. In 2021, Fed Chair Powell infamously said inflation would prove transitory, only to reverse course in 2022 when inflation had firmly taken hold. Now, Powell risks the opposite. If Powell falls behind the curve, it could take more significant rate cuts to restore GDP growth, resulting in more economic damage than necessary. President Trump clearly believes that's the biggest economic risk, given he's ratcheted up his rhetoric toward Powell earlier this year, referring to him as "Mr. Too-Late" and saying after last week's job reports that Powell should immediately cut the Fed Funds Rate by 1%. More Economic Analysis: Hedge-fund manager sees U.S. becoming GreeceA critical industry is slamming the economyReports may show whether the economy is toughing out the tariffs Ken Fisher says the president's desire for lower rates may reflect his understanding that tariffs could be a drag on GDP later this year. "He [Trump] has said, repeated negative comments about Fed Chair Jerome Powell, including the notion that his term couldn't be over soon enough, making many people envision the President trying to fire him," said Fisher on X. "The more the President criticizes Powell, the more certain it is that Powell does not do what the President wants. He wants the Fed to lower interest rates at least partly to offset the drag on the economy that the tariffs the President wants will impose." Powell is adamant about the Fed's independence. The Fed was designed to avoid the risk of bending to political will, recognizing that politicians' and lobbyists' desires aren't necessarily always aligned with what is best for the economy long term. "The fundamental feature of the Fed almost above and beyond all others is to want and need to appear to be truly independent from political pressure... Their image of integrity is central to getting people to believe that what they're doing is not jerry rigged by politics," said Fisher. Fisher predicts that Powell won't be successfully removed before his term expires in May 2026. "Jerome Powell has said that he will not go softly into that good night, and... many people wonder if the President will just do it... Mind you that may well happen, a good long time after America takes over Canada and Greenland," joked Fisher. While Fisher thinks it's possible that Trump has a change of heart and renominates Powell, it is most likely that Trump will look to nominate a "Toadie" before next May, who he believes will bend to Trump's will regarding interest rate cuts. Fisher says Trump wants to "nominate someone he thinks will be a toadie." However, there's no guarantee that the person nominated won't change their mind once they're confirmed, and "decide for the purpose of the Fed's integrity and his own integrity, he can't do that." Overall, Fisher's take on Fed Chair Powell's future is pretty blunt. "The President is not going to be able to fire Jerome Powell," concluded Fisher. "Jerome Powell is going to finish out his term." Related: Veteran fund manager revamps stock market forecast The Arena Media Brands, LLC THESTREET is a registered trademark of TheStreet, Inc.
