Fed Officials Keep Speaking Cautiously About Cutting Interest Rates Further

– Cook: More Rate Cuts ‘Likely’ but Size, Timing to Depend on Data

– Schmid: “It Remains to Be Seen’ How Much Lower Rates Should Go

By Steven K. Beckner

(MaceNews) – Federal Reserve policymakers have continued this week to signal caution on further interest rate reductions.

When the Fed’s policymaking Federal Open Market Committee initially slashed the federal funds rate on Sept. 18, FOMC participants projected the policy rate would need to be lowered an additional 200 basis points, and Chair Jerome Powell openly talked about proceeding to cut the funds rate toward “neutral” after the FOMC cut it again on Nov. 7.

Since then, Fed officials have sounded somewhat less decisive about additional rate cuts, mirroring Powell’s “careful” and “patient” approach.

Fed Governor Lisa Cook said Wednesday that further rate cuts are “likely,” but said “the magnitude and timing of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

While additional monetary easing may be appropriate, it could become appropriate to “pause” that process, she said.

The day before, Kansas City Federal Reserve Bank President Jeff Schmid was even more ambivalent about further funds rate cuts, saying “it remains to be seen” how much lower rates might need to go.

The Cook and Schmid remarks are consistent with what Powell said last Thursday when he made known the Fed is in no “hurry” to keep lowering interest rates and vowed to move “carefully” in determining how much more monetary easing might be needed.

Other Fed officials, including some usually thought of as being on the “dovish” end of the policy spectrum, have made similar indications.

FOMC participants will be publishing a fresh set of economic forecasts and rate projections in December, and Powell has noted the Fed will have in hand a lot of additional data on inflation and employment by that time. Conceivably, the eagerly awaited rate “dot plot” could look very different from what was released on Sept. 18.

At that time, the 19 Fed governors and presidents projected that the funds rate would end 2024 at 4.4% (a range of 4.25-4.50%), implying another 25 basis point rate cut next month. For next year they projected it will fall to 3.4% (3.25-3.50%), before ending 2026 at 2.9% (2.75-3.00%).

At 2.9%, the funds rate would coincide with the FOMC’s estimate of the ‘longer run” or “neutral” rate, which has been continually revised higher. Some officials, such as Dallas Fed President Lorie Logan, think it needs to be revised higher yet to reflect what they believe is a climbing “real” interest rate.

Recent data have not given the Fed a clear path forward. The economy has been growing well above the Fed’s estimate of its non-inflationary potential, driven by consumer spending. Although job gains have slowed, unemployment remains historically low at 4.1%. And inflation is still running well above the Fed’s 2% target. In October, the core consumer price index was up 3.3% from a year earlier.

Another key development that could tend to give Powell & co. pause (literally) is the post- election rally to record highs on Wall Street.

Cook, who is usually thought of as one of the more “dovish’ policymakers, leaned toward further rate cuts in a speech at the University of Virginia, but was not as assertive about that as she and others had previously been.

“(T)he totality of the data suggests that a disinflationary trajectory is still in place and that the labor market is gradually cooling,” she said. “As such, I view the risks to achieving the Federal Reserve’s dual mandate of maximum employment and price stability as being roughly in balance.”

“Consistent with those balanced risks, in my view, it likely will be appropriate to move the policy rate toward a more neutral stance over time,” she added.

Cook said the FOMC has already taken “a strong step toward removing policy restriction” with its cumulative 75 basis points of easing in September and November.

“Going forward, I still see the direction of the appropriate policy rate path to be downward, but the magnitude and timing of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” she said.

Echoing Powell, she said, “I do not view policy as being on a preset course, and I am ready to respond to a changing outlook.”

Cook added that she would consider “a range of scenarios when thinking about the path of policy.”

In one scenario, she said, “If the labor market and inflation continue to progress in line with my forecast, it could well be appropriate to lower the level of policy restriction over time until we near the neutral rate of interest, or the point when monetary policy is neither stimulating nor restricting economic growth.”

“However, if inflation progress slows and the labor market remains solid, I could see a scenario where we pause along the downward path,” she went on.

“Alternatively, should the labor market weaken in a substantial way, it could be appropriate to ease policy more quickly,” Cook added.

Cook said she “remain(s) confident that inflation is moving sustainably toward our 2% objective, even if the path is occasionally bumpy.”

While citing “significant progress on disinflation,” she said “the elevated core figure suggests that we have further to go before credibly achieving our inflation target of 2%. Although most price indicators suggest that progress is ongoing, I anticipate bumps along the road.”

Cook said her “confidence in continued disinflation is further reinforced by the moderation in wage growth.”

She seemed more concerned about the employment side of the Fed’s mandate, saying she sees employment risks as “weighted to the downside,” although she said “those risks appear to have diminished somewhat in recent months.”

Cook expressed concern that “national job growth is solid but perhaps not quite strong enough to keep unemployment at the current low rate. Net hiring so far this year is running somewhat below estimates for what economists call the breakeven pace, or the rate of hiring needed to keep the unemployment rate constant, when accounting for changes to the size of the labor force.”

“With job growth coming in below the breakeven pace, which was likely more than 200,000 jobs a month over the past year, the unemployment rate has risen from a historical low of 3.4% in April 2023 to 4.1 percent in October,” she noted.

Cook said the labor market “has largely normalized after being overheated,” but said she “will continue to watch incoming data carefully and remain attuned to signs of undesirable further cooling in the labor market.”

Schmid, who will be voting on the FOMC in 2025, described the combined 75 basis points of rate cuts thus far as “an acknowledgement of the Committee’s growing confidence that inflation is on a path to reach the Fed’s 2% objective—a confidence based in part on signs that both labor and product markets have come into better balance in recent months.”

However, he stopped well short of advocating further easing. “While now is the time to begin dialing back the restrictiveness of monetary policy, it remains to be seen how much further interest rates will decline or where they might eventually settle.” he said in remarks prepared for delivery to the Omaha, Nebraska Chamber of Commerce.

Schmid went on to explore the implications of soaring federal budget deficits for interest rates:

He recalled that prior to the pandemic “increased demand from financial institutions as well as strong growth in China and emerging markets had boosted demand for such assets, bidding up their price and holding down interest rates across the yield curve.”

But now, Schmid said, the situation is different and market interest rates could come under more upward pressure. That, in turn, can’t help but influence Fed-administered rates, he suggested: “(N)ow this demand (for Treasury securities) has cooled, even as the supply of government debt has jumped and is expected to continue growing at a very rapid rate,” he said. “As such, it is possible that the balance of demand and supply for government debt will shift from a factor holding down interest rates to a factor boosting interest rates.”

Schmid said “shifts in supply and demand for safe assets influence interest rates independent of the Fed’s actions,” but that doesn’t mean market rate movements have no impact on monetary policy, in the Kansas City Fed president’s view.

“Though the Fed is not a passive bystander and plays a role in setting short-term interest rates, it can’t perpetually deviate rates from market forces without risking its mandates for maximum employment and price stability,” he explained. “In this way, the Fed takes fiscal decisions as given and steers monetary policy in the appropriate direction to achieve its dual mandate ….”

Schmid added that “large fiscal deficits will not be inflationary because the Fed will do its job and achieve its inflation objective, though in doing so, the outcome could be persistently higher interest rates ….”

Fed Governor Michelle Bowman, known for being more hawkish than most of her colleagues, also called for “caution” Wednesday on the grounds that inflation remains a threat.

“(W)e have not yet met our inflation goal and, … progress in lowering inflation appears to have stalled,” she told the Forum Club of West Palm Beach, Florida. “I see greater risks to the price stability side of our mandate, especially while the labor market remains near full employment, but it is also possible that we could see a deterioration in labor market conditions.”

She called for “a dose of humility” in assessing economic data and making forecasts. “In light of the dissonance created by conflicting economic signals, measurement challenges, and data revisions, I remain cautious about taking signal from only a limited set of real-time data releases…. (U)ncertainty surrounding available data and the many variables that can affect future economic conditions suggest that we should pursue a cautious approach.”

Bowman dissented against the FOMC’s 50 basis point September rate cut, because she favored a more modest move. She said she voted for the 25 basis point cut because “it aligns with my preference to lower the policy rate gradually, especially in light of elevated inflation and the uncertainty about the level of the neutral rate.”

Her estimate of the neutral policy rate is “much higher than it was before the pandemic, and therefore we may be closer to a neutral policy stance than we currently think,” Bowman said.

Therefore, she said she “would prefer to proceed cautiously in bringing the policy rate down to better assess how far we are from the end point, while recognizing that we have not yet achieved our inflation goal and closely watching the evolution of the labor market.”

“We should also not rule out the risk that the policy rate may attain or even fall below its neutral level before we achieve our price stability goal,” Bowman added.

She said she was “pleased” that the FOMC’s November policy statement “included a flexible, data-dependent approach, providing the Committee with optionality in deciding future policy adjustments…. (M)y view is that inflation remains a concern, and I continue to see price stability as essential for fostering a strong labor market and an economy that works for everyone in the longer term.”

Later Wednesday, Boston Fed President Susan Collins, another 2025 voter, was much more emphatic about the need for additional rate cuts, but she too favored a “careful and deliberate” approach.

Citing inflation moderation and cooling labor markets, Collins said “it was appropriate to begin recalibrating monetary policy this fall.” And she said she “expect(s_ additional adjustments will likely be appropriate over time, to move the

policy rate gradually from its current restrictive stance back into a more neutral range.”

Echoing Powell, she said “policy is not on a pre-set path. The FOMC will need to make decisions meeting-by-meeting, based on the data available at the time and their implications for

the economic outlook and the evolving balance of risks.”

But Collins made clear she is more prepared to ease policy, saying it “needs to adjust in order to achieve our dual mandate goals.”

“While the final destination is uncertain, I believe some additional policy easing is needed, as policy currently remains at least somewhat restrictive,” she continued. “The intent is not to ease too quickly or too much, hindering the disinflation progress to date. At the same time, easing too slowly or too little could unnecessarily weaken the labor market.”

Collins said “there are risks to achieving both our inflation and our employment goals. On the inflation side, demand has been surprisingly resilient, and we could see more consumption growth than anticipated, putting upward pressure on prices…..”

“On the other hand, …. job growth is moderating, with recent gains concentrated in just a few sectors,” she went on “At this stage, any further slowing in hiring would be undesirable. In addition, an economy growing near trend may be morE vulnerable to adverse shocks – and geopolitical risks remain elevated.”

Collins said she see( risks to her “quite favorable baseline outlook” as “roughly in balance.” “Inflation is returning sustainably, if unevenly, to 2%, and to date, labor market conditions are healthy overall,” she elaborated. “Policy is well-positioned to deal with two-sided risks and achieve our dual mandate goals in a reasonable amount of time.”

Collins added that “the policy adjustments made so far enable the FOMC to be careful and deliberate going forward, taking the time to holistically assess implications of the available data for the outlook and the associated balance of risks.”