Federal Reserve officials on Friday reiterated why this week's rate cut decision was so contentious. In public remarks, one official argued that the central bank still has room for further cuts if the labor market weakens, while others warned that easing policy could jeopardize the Fed's hard-won progress on inflation.
The central bank voted 9-3 on Wednesday to lower the benchmark rate by 0.25 percentage points to a range of 3.5%-3.75%. Two officials preferred no cut, while one favored a more aggressive reduction. This marked the first time since 2019 that three policymakers formally dissented.
One of this week's dissenters, Kansas City Fed President Schmid, stated Friday morning that he opposed the cut because he saw no evidence that current rates were slowing economic activity enough to curb inflation. "Right now, I see the economy showing momentum with overheated inflation, suggesting policy isn't overly restrictive," he said.
Chicago Fed President Goolsbee, who also voted against the cut, indicated his opposition was more strategic. Having supported cuts in September and October, he said Friday the Fed could continue easing but didn't want to act too aggressively given stubborn inflation. "Fundamentally, rates could come down significantly from current levels once we clear immediate hurdles," he told a Chicago conference.
The Fed's 12-member policy committee consists of seven Washington-based governors, the New York Fed president, and four rotating regional bank presidents. Schmid and Goolsbee will rotate off next year, but their replacements—Cleveland's Mester and Dallas's Logan—have also recently expressed caution about cutting rates.
Mester said Friday she believes rates are nearing neutral levels that neither stimulate nor restrain growth, arguing for a more restrictive stance. Meanwhile, Philadelphia Fed President Harker, who will gain voting rights next year, largely agreed with Chair Powell's rationale for Wednesday's cut while keeping future options open. "Overall, I remain more concerned about labor market weakness than upside inflation risks," she said in a Friday speech.
The divisions reflect the Fed's first major policy dilemma in over 15 years: persistent inflation calls for higher rates while a softening job market suggests cuts. "You've got one tool. You can't do two things," Powell said Wednesday.
Harker said she's focusing on employment because inflation will "very likely" ease next year as tariff effects fade and housing costs moderate. However, with labor demand falling faster than supply, unemployment risks are rising. Though the job market remains "decent," she warned of growing risks of sharper slowdowns.
After three straight cuts totaling 0.75 percentage points, "we've taken preemptive steps against further labor market deterioration," Harker said. Current rates plus prior tightening should create a "modestly restrictive" stance to help curb inflation.
Before their January 28-29 meeting, officials will review delayed economic data. CME Group data shows investors now see less than a 25% chance of another cut.
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