The Federal Reserve's interest rate cut outlook changes dramatically! Trump's confidant suddenly changes tune

Federal Reserve Board Member Stephen Milam recently retracted his call for significant interest rate cuts this year.

Latest U.S. economic data have been released sequentially, with multiple Federal Reserve officials speaking intensively in recent days, revealing a diversity of views on monetary policy. Meanwhile, discussions within the Fed on AI’s economic impact, institutional independence, and policy tool adjustments have also become market focal points.

The latest employment figures show that for the week ending February 14, initial unemployment claims fell to 206,000, the lowest since January 10, significantly below market expectations of 225,000. The four-week moving average also declined slightly, confirming that the U.S. labor market remains resilient. While employment data improves, inflation concerns are resurfacing. Tensions in US-Iran relations have driven up oil prices, potentially fueling inflation. The Fed’s latest meeting minutes released on the 18th indicate that officials generally believe inflation will decline toward the 2% target, but the pace and timing are uncertain, and the process may be slower and more uneven. Persistent demand pressures could keep inflation elevated. Although tariffs’ impact on core goods prices may gradually diminish, the risk of sustained high inflation remains. Strong employment data combined with rising inflation worries have directly suppressed market expectations for Fed rate cuts.

Against this backdrop, internal Fed policy stances have shifted noticeably, with previously firm dovish positions softening significantly. Stephen Milam, a close confidant of Trump and previously one of the most dovish officials within the Fed, recently withdrew his call for substantial rate cuts this year. He stated that recent data show the labor market is performing better than expected, and signs of strengthening in goods inflation are emerging. Consequently, he adjusted his rate cut expectations from the December forecast of rates below 2.25% by the end of 2026 back to the more moderate stance from September, targeting a rate below 2.75% by year-end. This implies a cumulative rate cut of 1 percentage point from the current 3.5%-3.75%. This stance contrasts sharply with most Fed officials’ median forecast of only a 25 basis point cut this year, indicating Milam remains dovish. His shift also widens the gap between him and the White House’s economic policy stance. It is reported that Milam has resigned from his White House position; although his Fed term has ended, he may remain until a successor is confirmed by the Senate.

Minneapolis Fed President Neel Kashkari has taken a more hawkish stance. He explicitly stated that the current interest rate setting is near a neutral level that neither stimulates nor restrains the economy. Given that inflation still hovers above the 2% target, he, as a voting member of the Federal Open Market Committee (FOMC), is unwilling to support further rate cuts in the near term. Kashkari also strongly voiced concerns about Fed independence, criticizing White House National Economic Council Director Harris Hasset’s criticism of the New York Fed’s tariff research and calling for sanctions against those involved. He emphasized that such actions undermine Fed independence, which is based on data and analysis aimed at understanding economic dynamics. He also mentioned that the Justice Department’s investigation into the Fed’s building renovations reflects political pressure from the Trump administration. Kashkari reaffirmed the Fed’s core mandates of price stability and maximum employment. Regarding the nomination of Jerome Powell’s successor, Waller, he expressed openness to cooperation. On Waller’s view of balance sheet reduction, Kashkari noted that although the current $6.6 trillion balance sheet is well above pre-financial crisis levels, further shrinking is limited by technical factors such as global dollar demand and banking liquidity requirements, without fundamentally altering the financial system.

Beyond rate policy disagreements, the potential impact of AI technology on the economy has become an important topic among Fed officials. San Francisco Fed President Mary Daly stated that while AI has not yet fundamentally changed the U.S. economy, its development potential is significant. When and how it will have a profound impact remains to be seen, and its full effects may take longer to appear in macroeconomic data. Drawing on Greenspan’s experience with the internet revolution in the 1990s, she believes AI could follow a similar path—boosting the economy without fueling inflation, with productivity gains being key to economic expansion without high inflation. Daly emphasized that policymakers need to proactively identify structural shifts brought by AI, analyze detailed data rather than rely solely on macro indicators. She also supported the Fed’s decision last month to keep rates unchanged and still expects one or two more rate cuts this year. In contrast, Waller, the Fed nominee for chair, holds a different view, believing that AI is reshaping economic structures. If AI leads to productivity booms, the Fed should lower rates accordingly. The two officials thus diverge on the relationship between AI and monetary policy.

Currently, the U.S. labor market remains resilient, inflation risks are rising, and AI’s transformative potential is significant. Fed officials’ statements reflect both their assessment of current economic fundamentals and their differing outlooks on future policy directions. Market participants believe that the Fed’s future monetary policy may become more cautious, with a further reduction in the likelihood of rate cuts in the short term. Future policy adjustments are likely to depend more on marginal changes in economic data and the actual impact of technological innovations like AI.

(Source: Securities Times)