By Jamie McGeever
ORLANDO, Florida, April 30 (Reuters) – From Tokyo to Washington, central bankers are becoming increasingly divided on how to handle the global energy shock. Less unity means investors should brace for more policy uncertainty, murky messaging, and volatility in the months ahead.
As Brent crude hits $120 a barrel – double where it was at the start of the year – policymakers’ dilemma is clear. Should they raise interest rates to quell inflation, or cut them to support growth?
The preferred option appears to be sitting tight in the hope that the Iran war ends soon. But dissent, mostly from policy hawks, is reaching a fever pitch not heard for years.
On Wednesday, the U.S. Federal Reserve kept its federal funds target rate in a 3.50-3.75% range, as expected. But dissents by four policymakers – one to cut rates and three to remove the ‘easing bias’ from the accompanying statement – delivered an 8-4 split, the most divided vote since 1992.
One day earlier, the Bank of Japan also kept its key policy rate on hold as expected, at 0.75%. The 6-3 vote, with three officials calling for a hike, was the biggest split on the board since 2016.
These growing divisions will make communicating a unified message increasingly difficult. That risks sending investors and businesses mixed signals on the path for interest rates – exactly what they don’t need right now.
CHAIR WARSH IN A MINORITY?
Jerome Powell – in his last meeting as Fed chair, although not as a board member – said the division shouldn’t come as a surprise.
“It’s only natural that you have a range of views on the committee,” Powell told reporters after the meeting. “It’s partly a function of the extraordinarily challenging set of supply shocks that we’ve been dealing with now for five to six years.”
He has a point. The COVID-19 pandemic in 2020, Russia’s invasion of Ukraine in 2022, President Donald Trump’s tariffs in 2025, and now the Iran war represent an extraordinary set of shocks.
But the central bank now faces a potentially knottier challenge: having a Fed chair potentially at odds with the rate-setting committee.
Former governor Kevin Warsh is set to replace Powell next month, following a year of unprecedented public pressure on Powell from the White House and legal threats against the institution.
While Warsh has stated that the president has not asked him to make any policy promises, Trump said this week that he would be “disappointed” if Warsh did not immediately vote to cut rates.
Occasional dissents tend not to rock markets, but that could change if the new Fed chair finds himself in the minority, especially if rate decisions become closer calls.
“This scenario of a Chair Warsh in the minority position on interest rates would create waves in financial markets,” says Ryan Chahrour, professor of economics at Cornell University. “But Warsh will work very hard to avoid this outcome.”
Importantly, this changing of the guard is occurring at a time when the economic outlook is particularly opaque – exactly when clear communication is most important.
‘HIDDEN DISSENT’
More dissent at the Fed does appear to generate more market volatility. That’s the finding of a study published last year by Kwok Ping Tsang at Virginia Tech and Zichao Yang at Wenlan School of Business in Wuhan, China.
The researchers customized a deep learning model to measure ‘hidden dissent’ in FOMC transcripts, “disagreement … that is unobserved in formal votes.”
They found that ‘hidden dissent’ has significant market impact, increasing expected stock market volatility, negatively impacting share prices, and pushing up both bond yields and perceived interest rate risk.
“This confirms that how the committee reaches a decision, specifically the degree of underlying consensus or dissent, is valuable information for market participants beyond the stated policy or general tone,” they wrote.
In short, less consensus makes it more challenging for investors to determine the Fed’s next move.
The same may be true of other central banks. The weakness across Japan’s currency, bond and equity markets since Tuesday’s split decision suggests the BOJ’s communications aren’t coming across loud or clear.
Of course, this study looked at hidden dissent. What about unconcealed and increasingly vocal division? We’ll soon find out.
(The opinions expressed here are those of Jamie McGeever, a columnist for Reuters)
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(By Jamie McGeever; Editing by Chizu Nomiyama )
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