What's Ahead for New Fed Voting Members?

The Fed rotation is upon us, where four of the regional voting Fed presidents rotate out and four new presidents rotate in. The way they lean, hawkish or dovish, will be important, and will influence how they vote for monetary policy and interest rates. 

Reminder, the seven Fed governors (which includes the Fed Chair) always have a vote. Additionally, the New York Fed President is a permanent voting member because the New York Fed conducts all the Fed’s open market operations, such as the buying and selling of U.S. government securities in the secondary market.

One of the remaining four seats is always occupied by the Chicago or Cleveland Fed President, alternating each year. The remaining nine presidents occupy the last three voting seats on a rotating basis and each president will hold a voting seat every three years.

The four Fed presidents who will no longer be voting in 2025 (Thomas Barkin, Raphael Bostic, Mary Daly, and Beth Hammack) are all considered hawks. Among the four new voting Fed presidents for this year (Austan Goolsbee, Susan Collins, Alberto Musalem, and Jeffrey Schmid), we gained a dove in Austan Goolsbee. In fact, he is probably the most dovish Fed member and is in favor of cutting rates several more times to get to a neutral level. 

Doves tend to support lower short-term rates and an expansionary monetary policy because they value indicators like low unemployment over keeping inflation low. Hawks generally favor relatively higher short-term interest rates to keep inflation in check. They are less concerned with economic growth and more concerned with the long-term adverse effects of higher inflation.

When are more rate cuts expected?

When the Fed decides to cut or hike rates, they adjust the Fed Funds Rate, which is not mortgage rates or even a long-term rate. The Fed Funds Rate is a short-term, overnight rate that banks use to lend money to one another, but it is the building block for all interest rates.

After enacting a series of aggressive hikes between March 2022 and July 2024 to try to curb runaway inflation that became rampant after the pandemic, cooling consumer inflation and rising unemployment caused the Fed to cut rates three times late last year. And while inflation has cooled considerably after peaking in 2022, the progress lower towards the Fed’s 2% target has stalled in recent months.

This caused the Fed to be more hawkish in their forward guidance that was released after their meeting on December 18. Their "dot plot" of member forecasts signaled that two rate cuts are expected this year, down from four cuts forecasted in September, though these estimates can change quickly based on upcoming data.

In fact, the latest Jobs report for December (reported on January 10) was much stronger than expected, as 256,000 jobs were created, well above estimates of 160,000. The unemployment rate also fell from 4.2% to 4.1%.

While the headline job growth figure will be subject to revision in the next two reports, the initial market reaction was that the Fed may not be able to cut rates two times this year, given the strong jobs data and the slowing progress lower on inflation.

Again, this is a fluid situation and upcoming labor and inflation data can change this sentiment quickly. But for now, the odds of another rate cut happening early this year have diminished significantly.

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By Shelly Williams