Central bank leaders weigh rate cuts and stability threats as policy uncertainty takes centre stage
Policy uncertainty has surged to the forefront of financial stability risks, eclipsing even global trade concerns, as revealed in the latest Federal Reserve survey, according to Reuters.
In the biannual Financial Stability Report, 61 percent of respondents identified policy uncertainty—including issues surrounding central bank independence and the availability of economic data—as the top threat to stability.
This marks the first time central bank independence has been cited, following US President Donald Trump's move to dismiss Fed Governor Lisa Cook and his ongoing criticism of Fed Chair Jerome Powell for not lowering interest rates more aggressively.
Artificial intelligence has also emerged as a new source of concern, with 30 percent of the Fed’s market contacts warning that sentiment shifts around AI could trigger “large losses” in markets and broader economic repercussions, as reported by Reuters.
The report notes that while acute anxiety over global trade has diminished since April, overall policy uncertainty remains elevated.
Persistent US inflation, higher long-term interest rates, and fiscal debt sustainability continue to weigh on the outlook.
Divergent views among US central bankers now complicate the path forward for monetary policy.
St. Louis Fed President Alberto Musalem, speaking to Bloomberg Television, cautioned against further rate cuts, arguing that “there is limited room to ease policy further without policy becoming overly accommodative.”
Musalem pointed to inflation remaining closer to 3 percent than the Fed’s 2 percent target, and highlighted elevated stock valuations and house prices as reasons for restraint.
In contrast, San Francisco Fed President Mary Daly signalled more openness to easing, citing muted wage growth and the potential for productivity gains from artificial intelligence to support growth without stoking inflation.
Daly emphasized the need to remain vigilant on inflation, but warned against holding rates too high for too long, which could harm the economy.
Fed Governor Stephen Miran has been the most vocal advocate for aggressive policy easing, repeating his call for a half-percentage-point cut at the upcoming December meeting, as reported by CNBC.
Miran argued that “not continuing to ease would be short-sighted,” given softening inflation and labour market data. He stressed the need for forward-looking policy, noting that it takes 12 to 18 months for monetary policy changes to impact the economy.
Financial markets are currently pricing about a 63 percent chance of a quarter-point cut in December, though that probability has been declining since the October Fed meeting.
Meanwhile, the US commercial real estate market is showing signs of stabilization, but a large volume of debt maturing in the coming year could introduce fresh volatility if forced sales occur, as per Reuters.
Consumer and student loan delinquencies remain elevated, and leverage in hedge funds and life insurance companies is at historic highs.
The Fed continues to monitor the opaque private credit market, though recent high-profile bankruptcies in that sector appear to be isolated incidents.
As policymakers grapple with incomplete economic data due to the government shutdown, the debate over the direction of US monetary policy remains unsettled.
The outcome of the December Federal Open Market Committee meeting will be closely watched for signals on the Fed’s next move.
