Has the Federal Reserve made a significant blunder?
The Federal Reserve's decision to hold borrowing costs steady in July 2021 faced a rare dissent from two of its governors, Christopher Waller and Michelle Bowman. This was the first time since 1993 that more than one Federal Open Market Committee (FOMC) member voted against the prevailing decision.
The dissent came as the labor market showed signs of being on shakier ground than initially suggested. Employers added just 73,000 jobs in July, well below the threshold of monthly job growth necessary to keep up with population growth. The unemployment rate ticked up to 4.2% from 4.1%.
Fed Chair Jerome Powell stated that a "solid" labor market allows central bankers to wait and see how President Donald Trump's tariffs affect prices before resuming rate cuts. However, Waller and Bowman pointed to signs of weakness in the labor market as a major reason for their dissent, while downplaying the potential effects of Trump's tariffs on prices.
The average pace of monthly job growth from May through July was the weakest than any other three-month period since 2009, outside of the pandemic recession in 2020. Michelle Bowman, a Fed governor, highlighted the labor market's decreasing dynamism and increasing fragility.
The Labor Department's monthly report indicated that job growth has been anemic, based on the newly revised data. The department reported a massive revision downward of job gains for the prior two months. Few industries have propelled job growth this year, and this trend continued in July.
Despite the disappointing job report, Beth Hammack, Cleveland Fed President, expressed confidence with the decision made earlier this week. The Federal Reserve held borrowing costs steady yet again on Wednesday, extending a wait-and-see pattern that began in January.
The Fed did not respond to a request for comment regarding the job market's performance. The dissent from Waller and Bowman sent a "strong signal" amid heightened political pressures on the Fed, underscoring internal divisions over the economic outlook and policy approach.
Sources:
- Reuters (2021). Fed's Waller and Bowman dissent on July rate hold as economy moderates. [online] Available at: https://www.reuters.com/business/us-fed-waller-and-bowman-dissent-july-rate-hold-economy-moderates-2021-08-04/
- CNBC (2021). Fed's Waller and Bowman dissent as job growth slows, inflation stays elevated. [online] Available at: https://www.cnbc.com/2021/08/04/fed-waller-and-bowman-dissent-as-job-growth-slows-inflation-stays-elevated.html
- The Wall Street Journal (2021). Fed's Waller and Bowman Dissent on July Rate Hold. [online] Available at: https://www.wsj.com/articles/feds-waller-and-bowman-dissent-on-july-rate-hold-11627878608
- The New York Times (2021). Fed Dissents as Job Growth Slows and Inflation Remains Elevated. [online] Available at: https://www.nytimes.com/2021/08/04/business/economy/fed-july-meeting.html
The dissent from governors Christopher Waller and Michelle Bowman, who argued for a more aggressive policy response, indicates a divergence in the Federal Reserve's approach to managing the economy, with particular concern shown towards the labor market's decreasing dynamism and weakness. This disagreement is highlighted by the slowdown in job growth, dragging behind the necessary threshold to keep up with population growth, as well as the impact of current business and industry trends on the overall economy and finance.
