This week, Mark takes us through the big surprise to come out of the Federal Reserve meeting. Believe it or not, it had nothing to do with a rate cut, a barbed tweet, or anyone stepping down from their post. It was a quiet dissent that spoke the loudest. Two members of the Federal Reserve Board voted contrary to the Board Chairman, Jerome Powell. It’s actually the first time since 1993 that two Governors voted against the recommendations of the chairperson.
Well, if you want to hear more, or understand how this could potentially impact your portfolio, then click the link and watch the video. It’s short and simple and gets to the meat of the issue.
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Transcript: Financial Flash #252: The Fed Update
Good afternoon, and thank you for joining me. Today, I’d like to walk you through the Federal Reserve’s latest policy decision, why it matters for the economy, and how we see it affecting portfolios.
At their most recent meeting, the Federal Reserve chose to leave the target range for the federal funds rate unchanged at 4.25 to 4.50 percent. On the surface, that decision was widely expected. The markets had already priced in a “pause,” and there was no strong indication going into the meeting that a change was imminent. But beneath the surface, something unusual happened — something we haven’t seen in more than 30 years.
Two members of the Federal Reserve’s Board of Governors, Michelle Bowman and Christopher Waller, broke with Chairman Jerome Powell and the majority of the committee, voting instead for a quarter-point rate cut. This “double dissent” is not just rare; it’s the first time since 1993 that two governors have voted against the chair’s decision in the same meeting. That alone makes this a historic policy moment, and it tells us there is a growing debate inside the Fed about the right course for interest rates.
So what’s driving the split? Those in favor of cutting rates now are looking at the labor market and seeing early signs of a slowdown. We’ve had downward revisions to job growth numbers and the unemployment rate has moved up to 4.2 percent. For them, these are early warning signals that the economy might be softening enough to justify preemptive action.
On the other hand, those favoring patience are focused on inflation. They want more consistent evidence that price pressures are firmly on a path back to the Fed’s two percent target. From their perspective, moving too quickly could undo progress and risk reaccelerating inflation.
When we look at inflation, we follow the Fed’s own preferred measure: the core personal consumption expenditures index, or core PCE. This measure strips out food and energy prices, which tend to be volatile, and gives us a clearer read on the underlying trend. As of June, core PCE was running at 2.8 percent year-over-year. That’s well down from its peak in 2022, but still a bit above the Fed’s goal.
Economist Brian Wesbury (First Trust) has been very consistent on a key point here: in his view, the money supply — measured by M2 — is the biggest driver of the overall level of inflation, far more important than tariffs or other policy changes that affect individual goods. Tariffs may move prices around within the basket, but M2 determines the height of the waterline. After a historic contraction in 2022 and 2023, M2 has turned upward again, growing about 4 percent over the past year and remaining roughly six trillion dollars higher than its pre-pandemic level. That’s one reason inflation has been sticky in the high 2’s to low 3’s, rather than gliding straight to 2 percent.
History offers some context as well. In the mid-1990s, when the federal funds rate hovered near 4 percent, core inflation averaged about 3.0 percent. In 2001, that figure was closer to 2.7 percent, and in late 2005 it was roughly 2.2 percent. Taken together, that works out to an average of about 2.6 percent. While history doesn’t dictate the future, it suggests that rates around 4 percent often coexist with inflation in that low-to-mid 2 percent range.
For investors, this backdrop means that even if the Fed does deliver one or two rate cuts over the coming year, cash and short-term bonds will likely remain attractive compared with what we saw in the decade after the financial crisis. A gradual easing in inflation, without a sharp downturn in growth, would favor intermediate-term, high-quality bonds as a stabilizing force in portfolios. In the equity markets, companies with strong balance sheets and pricing power should be well-positioned to navigate an environment of modest inflation and slowing — but still positive — economic growth. And while real assets and private credit can still play a role as diversifiers, we would be mindful of position sizes if the economy continues to lose momentum.
In sum, the Fed’s decision to hold rates steady was not the surprise. The surprise was the rare, historic double dissent — a sign that the conversation inside the central bank is shifting from whether to cut rates to when. Inflation is moving in the right direction, but money supply trends remind us the path will not be a straight line. History suggests we may settle into an environment where both rates and inflation are a bit higher than the norms of the last decade, but still well within a range that long-term financial plans can manage.
