Month: May 2026

To celebrate International Workers’ Day, let’s have a look at the word “additional” in the FOMC statement of April 29, 2026.

To review:

On Wednesday, its latest forward guidance hinted that lower interest rates might be the only possibility moving forward, noting it will consider “additional adjustments to the target range for the federal funds rate.” In its latest move, the Fed this week kept its key interest rate unchanged for the third consecutive meeting.

The word “additional” specifically drew objections. Fed presidents Lorie Logan of Dallas, Beth Hammack of Cleveland and Neel Kashkari of Minneapolis “did not support inclusion of an easing bias in the statement at this time,” according to the Fed on Wednesday, so all three of them cast dissents. The three Fed presidents released statements Friday detailing why that was a mistake.

Dallas Fed President Lorie Logan’s statement says:

At this week’s Federal Open Market Committee (FOMC) meeting, I supported the decision not to change the target range for the federal funds rate. However, I dissented from language in the post-meeting statement that suggests the next adjustment to the target range will most likely be a cut.

The statement says: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” This language evolved out of the series of three rate cuts the FOMC made last fall. In that context, “additional adjustments” implies the next rate change, whenever it occurs, will most likely (though not certainly) reduce the target range again. I disagree with that assessment of the policy outlook.

I am increasingly concerned about how long it will take inflation to return all the way to the FOMC’s 2 percent target. Congress charges the FOMC with setting monetary policy to achieve maximum employment and price stability. The FOMC has repeatedly reaffirmed that personal consumption expenditures (PCE) price inflation of 2 percent is most consistent with those mandates. Yet PCE price inflation has exceeded 2 percent for more than five years. To forecast where headline inflation is headed, I look to measures of inflation that strip out extreme price changes or categories where prices are more volatile. Even before recent increases in the prices of energy and other commodities, those measures had been running meaningfully above 2 percent, leaving doubts about how long it will take inflation to return to target. The conflict in the Middle East raises the prospect of prolonged or repeated supply disruptions that could create further inflationary pressures. At the same time, the labor market has been stable, with low unemployment and payroll job gains keeping pace with labor force growth.

The economic outlook is highly uncertain, however. The inflation outlook could improve if tariff-related price increases subside, housing prices continue to soften and commodity supply disruptions resolve quickly. On the other hand, inflation could remain stubbornly high. The labor market could strengthen or weaken amid the crosscurrents of changes in trade patterns, technology, energy costs and immigration. Depending on which of these scenarios materialize, it could plausibly be appropriate for the FOMC’s next rate change to be either an increase or a cut.

When the FOMC gives forward guidance about the likely course of future interest rates, as in the recent post-meeting statement, that guidance is an important policy tool. It influences financial conditions and the economy, and it affects the achievement of the FOMC’s maximum employment and price stability goals. Equally, households and businesses rely on the guidance to make future plans. When the FOMC gives forward guidance, it is important for that guidance to reflect the policy outlook. In light of the two-sided risks to monetary policy, I believed the FOMC should not give forward guidance implying a bias toward rate cuts at this time.

Federal Reserve Bank of Minneapolis President and CEO Neel Kashkari’s statement is much longer (with charts!) and says in part:

I supported the Federal Open Market Committee’s (FOMC) decision to hold the federal funds rate at this week’s meeting,1 but I dissented against the FOMC’s action because I did not think it was appropriate to continue to include the following phrase in the policy statement: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate …”

While that phrase is not a commitment to make further cuts to the policy rate, it is widely interpreted by Fed watchers to indicate the Committee’s expectation that the next adjustment to the federal funds rate would be a cut. I consider this language a form of forward guidance about the likely direction for monetary policy. Given recent economic and geopolitical developments and the high level of uncertainty about the outlook, I do not believe such forward guidance is appropriate at this time. Instead, the FOMC should offer a policy outlook that signals that the next rate change could be either a cut or a hike, depending on how the economy evolves. Forward guidance is itself an instrument of monetary policy: It can influence financial conditions today, potentially slowing or hastening the achievement of our dual mandate goals.
…
Prior to the conflict in the Middle East, even though inflation had been above our target for almost five years and was still too high (as shown in Figure 1), I felt fairly confident that core inflation was headed back to our 2 percent target. Tariffs had clearly pushed up goods inflation, but that increase likely would have waned during 2026 as prices fully adjusted to the new tariff regime. Research by Minneapolis Fed economists indicated that housing services inflation was well on its way back down, with new leases having fallen to low levels and the slow process by which those new leases translate into housing services inflation being well understood. That only left nonhousing services inflation, which should be tied to wages, and wage growth continued to cool. Finally, I was somewhat comforted by the fact that both market and survey measures of long-run inflation expectations appeared well anchored at our 2 percent target (see Figure 2).

Meanwhile, the labor market appeared lukewarm but largely stable with the unemployment rate having hovered around 4.3 percent since May 2025, somewhat above my estimate of the rate consistent with maximum employment (see Figure 3). We had been in a low hire, low fire environment for some time.

Thus, while we appeared to be modestly missing on both sides of our dual mandate, I had more confidence that inflation was headed back to target than that the labor market was on track to reach maximum employment. Given that I viewed policy as mildly restrictive, some further cuts to the federal funds rate would likely be appropriate over time. Hence, I supported including the “additional adjustments” language in the policy statement, and my December and March Summary of Economic Projections (SEP) indicated one more 25 basis point cut in 2026. The conflict in the Middle East had just begun when the FOMC met in March; hence, it did not yet lead me to adjust my outlook since it was unclear how long the conflict would last and how severe any potential disruptions would be.

Although there are many potential economic scenarios that could result from the Iran war, for monetary policy, I am focused on two primary ones:

The first scenario is a fairly quick reopening of the Strait of Hormuz. Financial markets appear to be adopting this scenario as their base case, as indicated by oil futures, which expect prices to fall to around $88 by year-end 2026. Even in this more benign scenario, Blue Chip forecasters expect core inflation (PCE) to be 3 percent this year (up from an expectation of 2.7 percent as of January). If they are right, core inflation will have been at roughly 3 percent for three years in a row. Such a meaningful inflation shock could put downward pressure on spending in the U.S. as consumers are forced to cut back on less-essential purchasing, potentially pressuring the U.S. labor market. In such a scenario, I could imagine the optimal monetary policy response to be holding rates where they are for an extended period and then easing only gradually, once the inflation shock has begun fading, having proven to be transitory.

The second scenario is more concerning, with an extended closure of the Strait of Hormuz and potentially further damage to energy and commodity infrastructure in the Middle East. If this were to happen, the price shock wave could be much larger than is currently expected, driving up both inflation and unemployment in the U.S. With inflation having been elevated for almost six years and counting, I believe the FOMC would have to take very seriously the risk of an unanchoring of long-run inflation expectations. While financial market indicators suggest expectations are anchored today, I believe those signals assume both a more benign war scenario and an FOMC that is committed to defending that anchor. Hence, we likely would have to follow through with a strong policy response to vindicate those expectations. Federal funds rate increases, potentially a series of them, could be warranted, even at the risk of further weakness to the labor market. I firmly believe that anchored long-run inflation expectations are necessary for achieving maximum employment and a vibrant economy.

Given the uncertainty about the path of the conflict and the resulting effects on inflation, employment and economic growth, I believe the FOMC should offer a policy outlook that signals that the next rate change could be either a cut or a hike, depending on how the economy evolves. This could tighten financial conditions somewhat today, pushing back against a high-inflation scenario that could require an even stronger monetary policy response in the future.

Federal Reserve Bank of Cleveland President Beth Hammack’s statement states:

Uncertainty around the economic outlook has increased in 2026 and makes the future path for monetary policy more uncertain, as well. At this week’s FOMC meeting, I supported holding the federal funds rate steady. I dissented from the post-meeting statement because I did not believe it was appropriate to include an easing bias around the future path for monetary policy. The current FOMC statement references language around “additional adjustments.” This forward guidance was put into the statement to signal a pause rather than an end to the easing cycle. I see this clear easing bias as no longer appropriate given the outlook.

Activity in the US economy has been resilient thus far in 2026, and the unemployment rate has been little changed near my estimate of full employment since last summer. Inflation pressures continue to be broad based, and rising oil prices present an additional source of inflationary pressure. Uncertainty around the economic outlook is elevated, with upside risks to inflation and downside risks to growth and employment.

A wide range of viewpoints is a cornerstone of our robust policy process. I look forward to continuing to work with FOMC colleagues to set monetary policy toward our goals of maximum employment and price stability.

This is all good stuff. Businessmen and their financial backers can see which issues are important to the decision-makers and be more confident in their own forecasts of likely monetary policy. We don’t get transparency like this in Canada, because BoC governors are too damn pompous to disagree with each other and would not dream of exposing themselves to criticism from the hoi polloi.