Fed’s new projections to account for turbulent period as Miran joins debate

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By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) -The end of the Federal Reserve’s policy meeting on Wednesday will convey a three-part message for investors, showing how much officials have reshuffled their outlooks to account for a weakening job market, how divided the U.S. central bank is becoming over the interest rate path and whether the arrival of Governor Stephen Miran has given it all a partisan tilt.

Designed to be above the political fracas, the Fed nevertheless has been dragged steadily into Washington’s polarized conversation.

Republicans blame Biden administration appointees for pushing the central bank into inappropriate areas like climate change and racial equity and teeing up rate cuts during the 2024 presidential election campaign. Democrats point to President Donald Trump’s pressure campaign, including an attempt to fire Governor Lisa Cook, an appointee of former President Joe Biden, moves to try to force out Fed Chair Jerome Powell, and now the presence of Miran – on leave from his White House economic advisory role – after a rushed confirmation by the U.S. Senate.

Both Cook, who became a Fed governor in 2022, and Miran were confirmed by one-vote margins on largely party-line votes, part of a recent drift towards more divided confirmation votes for central bank nominees.

RATES EXPECTED TO FALL

The Fed meeting is scheduled to conclude at 2 p.m. EDT (1800 GMT), with investors expecting the central bank to cut its benchmark interest rate by a quarter of a percentage point from the 4.25%-4.50% range that has been in place since December, when Trump’s election raised concerns that his import tariffs might reignite inflation and slow economic growth.

Before Trump’s return to the White House, Fed officials had expected that inflation would continue to decline to the central bank’s 2% target, which would allow a steady series of rate cuts to bring borrowing costs towards a more neutral level.

Rates have moved sideways since then while inflation has picked up.

More recently, however, the job market appears to have weakened, with more Fed officials open to the idea that they need to insure against a sharp rise in unemployment by lowering borrowing costs somewhat.

How far and how fast, though, remains a matter of dispute, and analysts say the meeting this week could be marked by an unusual number of dissents – both in favor of no rate reductions from those still concerned about inflation, and in support of a larger half-percentage-point cut potentially by Miran and two other Trump appointees who have argued since the summer that inflation risks had eased and the job market was weakening.

Fed Governor Chris Waller and Vice Chair for Supervision Michelle Bowman dissented at the July 29-30 meeting, saying rates should have been reduced at that time, and reports on the job market since have bolstered their concerns about employment. Both officials are on a list of 11 potential candidates to succeed Powell after his term as Fed chief expires next May.

POTENTIAL DISSENTS IN BOTH DIRECTIONS

“The data doesn’t reduce the case of a 25-basis-point cut,” Karim Basta, chief economist at III Capital Management, wrote last week. “But it does raise the prospect of a three-way dissent, with dissent in favor of no change and dissent in favor of a 50-basis-point cut, especially if Miran is voting.”

Miran was sworn in on Tuesday to a term that ends on January 31, a four-month stint that will put him at the Fed’s policy table for this meeting and the ones in October, December and late January. The administration says its current plan is for him to return as head of the White House’s Council of Economic Advisers at that point.

Unless Trump successfully removes Cook, whose term is set to run until 2038, or some other Fed member leaves office, he may need Miran’s seat to appoint a new head of the seven-member board when Powell’s term as Fed chief ends in May. It is not certain Powell will relinquish his Fed board seat before his term as a governor expires at the end of January in 2028.

Assuming Miran adds economic projections to the new set of forecasts to be released on Wednesday, his view will be added to a “dot plot” that in June showed officials both concerned about stagflation – a combination of rising prices and stagnating growth – and divided over what to do about it.

The median projection in June, when confusion over final tariff levels remained intense, showed officials shifting their rate outlook higher, with a slower pace of decline to account for an expected slower easing of price pressures.

But the median projection masked a fundamental cleavage, with seven of 19 officials anticipating no rate cuts this year and 10 anticipating two or more. The other two officials expected one rate cut.

The updated Summary of Economic Projections will get microscopic treatment for changes to that narrative, and plenty of second guessing for signs of a partisan split – in particular whether Miran’s projections are aligned with Trump’s demand for ultra-low interest rates and an all-is-great view of the economy, or blend in with his Fed colleagues.

Beyond the September cut, investors will be looking for evidence, particularly in Powell’s post-meeting press conference and the new projections, of whether the Fed seems to be expecting a steady series of cuts now, or will wait for upcoming data to make meeting-by-meeting decisions.

Markets are currently pricing in quarter-percentage-point cuts at the October and December meetings, with a less certain pace next year.

Michael Feroli, chief U.S. economist at JP Morgan, said he expects Miran to “dutifully dissent” at this meeting in favor of a steeper cut, and for the median projection to reflect three quarter-percentage-point cuts this year versus the two in the June projections. But he also said concerns about inflation will not have disappeared and that “in dissenting, the doves have less ability to shape the messaging in the statement” endorsed by the majority.

(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)