– Bostic: Lower Inflation, Bigger Job Risk Justified Big Cut but Must Be ‘Patient’
– Goolsbee Foresees ‘Many More Rate Cuts’; FFR Hundreds of Basis Points Over Neutral
– Kashkari: Balance of Risks Has Shifted From Inflation to Unemployment
By Steven K. Beckner
(MaceNews) – Three Federal Reserve Bank presidents said Monday they are prepared to support further interest rate cuts now that they have gained “confidence” that inflation is on its way to the Fed’s 2% target, but left in some doubt the size and pace of further rate cuts.
Atlanta Fed President Raphael Bostic, a voting member of the Fed’s rate-setting Federal Open Market Committee, defended the FOMC’s half percentage point cut in the federal funds rate by saying upside risks to inflation have diminished while downside risks to employment have increased.
He said the funds rate remains “restrictive” and “a fair distance” above neutral, so further “recalibration” is needed.
Many observers thought the FOMC should only ease monetary restraint by 25 basis points last Wednesday, but Bostic said a larger move was needed because of “growing uncertainty about the trajectory of the labor market.” And he suggested “any further evidence of material weakening in the labor market” would incline him to continue aggressive rate cutting.
At the same time, though, Bostic advocated a “patient” approach, warning that easing too fast could revive wage-price pressures and force the Fed to reverse course.
Chicago Fed President Austan Goolsbee, who will be an FOMC voter next year, said greater confidence in disinflation and greater concern about rising unemployment “likely means many more rate cuts over the next year.” He said a 50 basis point cut was needed as “a demarcation that we are back to thinking more about both sides of the mandate,” but said that is only a start.
Goolsbee said the Fed has effectively been “tightening” policy in real terms as inflation has moderated, so rates need to fall “significantly” further because the current funds rate is “hundreds of basis points above neutral.”*
Minneapolis Fed President Neel Kashkari, who was often one of the more hawkish Fed officials this year, joined the chorus, saying “the balance of risks has now shifted away from higher inflation toward higher unemployment.” He added that “even after the 50 basis-point cut …, the overall stance of monetary policy remains tight.”
None of the officials were specific about the future rate path, as that will depend on how incoming data on inflation, employment and GDP growth depict the economic outlook and the “balance of risks.”
Their comments come less than a week after the FOMC cut the funds rate an aggressive 50 basis points to a target range of 4.75% to 5.00%, having previously raised it 525 basis points in a belated war against inflation and leaving the policy rate in a range of 5.25-5.50% since last July.
In their revised quarterly Summary of Economic Projections, the 19 FOMC participants projected the funds rate will end 2024 at a median 4.4, implying 50 basis points of further reductions to a target range of 4.25% to 4.5% over the final two meetings of the year. They projected the funds rate will fall to a median 3.4% by the end of 2025 (a range of 3.25% to 3.5%), and to 2.9% by the end of 2026 (a range of 2.75% to 3.0%).
That 2.9% anticipated end point for 2026 would coincide with the FOMC’s upwardly revised 2.9% estimate of the “longer run” neutral rate.
Fed Governor Michelle Bowman dissented in favor of a 25 basis point cut, which she justified Friday on the grounds that the economy remains strong and inflation is still too far above 2%.
Chair Jerome Powell, speaking to reporters following last Wednesday’s rate action, explained the 50 basis point move by saying upside risks to inflation had fallen while downside risks to the economy and labor markets had increased. He said the FOMC had “made a good start” toward returning the funds rate to “more neutral” or “normal” levels and would continue to move in that direction “meeting by meeting.”
Powell said the FOMC could lower rates either faster or slower, or “pause,” depending on what incoming data show.
Some questioned the FOMC’s decision to lower rates 50 rather than 25 basis points, but Powell defended the move, saying, “there’s no sense that the Committee feels it’s in a rush to do this. We made a good, strong start to this and that’s really, frankly, a sign of our confidence. Confidence that inflation is coming down toward 2 percent on a sustainable basis.” He also denied the Fed is “behind” in waiting this long to start easing monetary policy.
Fed officials comments on Monday were generally in line with Powell’s message.
Bostic had been more reluctant than some to ease credit earlier this year, but by the time of the September meeting, he agreed that a 50 basis point rate cut was “an appropriate and necessary first step in recalibrating monetary policy in light of evolving economic conditions.”
He said “we have made sufficient progress on inflation, and the labor market has exhibited enough cooling, that the time has come to shift the direction of monetary policy to better reflect the more balanced risks to our price stability and maximum employment mandates that have emerged over the course of the year…”
“I envision normalizing monetary policy sooner than I thought would be appropriate even a few months ago,” he told a seminar hosted by the European Economics and Financial Center at the University of London. “By ‘normalizing,’ I mean returning our policy to a place where it is no longer necessary to promote restrictive financial conditions to achieve our inflation target.”
Explaining why he supported a 50 basis point cut, rather than a smaller one, Bostic
said it was time to move the funds rate closer to “neutral,” which the FOMC now defines as 2.9%.
“If the economy is basically satisfying our mandates, then the appropriate policy stance would be one where the federal funds rate is neither stimulative nor restrictive for economic activity, a rate often referred to as the neutral rate…,” he said. “Wherever the neutral rate is, I don’t know anyone who would plausibly argue with the notion that we are a fair distance above it.”
Rhetorically asking why the FOMC didn’t cut rates by even more than 50 basis points, Bostic said, “there remains some uncertainty about whether we can really be fully confident that both our inflation and employment goals are fully within reach ….. I will not be comfortable claiming victory if we stall short of our inflation goal….”
Bostic said he “would like to let a little time pass as we remove restrictiveness, so I can see more inflation evidence and hopefully better understand where we are.”
But he added that cutting rates by only 25 basis points “would belie growing uncertainty about the trajectory of the labor market.”
Bostic said, “the labor market is not yet flashing red for me,” but said “employment growth over the past year has not been as strong as initial data releases suggested. Any further evidence of material weakening in the labor market over the next month or so will definitely change my view on how aggressive policy adjustment needs to be.”
He said, “the 50-basis-point adjustment at the meeting last week positions us well should the risks to our mandates turn out to be less balanced than I am thinking.”
Bostic said, “policy remains in the restrictive range, so if my optimism about inflation is unsatisfied, then the Committee can slow or even halt the pace of further reductions.”
However, he added, “Should labor markets prove substantially less healthy than they appear at the moment, the 1⁄2 percentage point reduction puts us in a better position to adjust than a more modest cut would have.”
Bostic said the 50 basis point cut “does not lock in a cadence for further moves.”
But he continued to counsel caution as the Fed removes monetary restriction in response to questions.
“No one should think we’re in some mad dash to get to the neutral level,” Bostic said. “Being more patient will be valuable ..…”
“When surprises come in …, we will be in a position to take our time …,” he went on, adding that such a “patient” approach will enable the FOMC to move “more appropriately, so we’ll not have to go back on what we‘ve done.”
“I’m very much in favor of not rushing to judgment,” he added, noting “there’s stilla lot of red in that (inflation) chart.”
Meanwhile, Bostic said he is “optimistic about the labor market. It’s not flashing red, and it’s important we keep it that way.”
Responding to another question, Bostic said he has been “of the view that inflation would fall in a fairly orderly way and not incredibly fast. In that context, we will have time to make sure inflation gets all way to our 2% target.”
He added that he has “heard consistently that it would be quite unfortunate if we were cutting rates and then would have to turn around and increase them again.. That would introduce uncertainty and volatility in the market, so we want to be absolutely sure we’re on path to 2%.”
On the other side of the Fed’s dual mandate, Bostic described the labor market as “healthy,” but said, “if we were to see signs of deterioration that would be another reason to accelerate the path back to neutral.”
Bostic said he believes the “neutral” funds rate lies between 3% and 3 1/4%, but said estimates vary from 2% to 5%.
Goolsbee, who has a reputation as one of the most dovish policymakers, was more emphatic about the need to bring rates down as he vigorously supported last week’s rate cut in remarks to the National Association of State Treasurers Annual Conference, telling the audience that the funds rate needs to fall “hundreds of basis points” to get to neutral. Otherwise, he suggested, the Fed would risk recession.
“At a moment like this, it’s important for the Fed to think beyond the short run and identify the through lines of the economy,” he said. “That longer arc said it was time to act and suggests there will be more to come.”
Goolsbee observed that “inflation is way down from its peak …..Yet rates are the highest they’ve been in decades.”
“It makes sense to hold rates like this when you want to cool the economy, not when you want things to stay where they are,” he said.
Goolsbee said it made sense for the FOMC to focus on inflation when it was well above target, “but as we’ve gained confidence that we are on the path back to 2%, it’s appropriate to increase our focus on the other side of the Fed’s mandate—to think about risks to employment, too, not just inflation.”
“And given the through line on economic conditions, that likely means many more rate cuts over the next year,” he added.
“If we want a soft landing, we can’t be behind the curve …,” Goolsbee warned. “(K)nowing that labor markets tend to deteriorate quickly when they turn and that monetary policy takes time to act, it’s just not realistic to wait until problems show up.”
Justifying the FOMC’s unusual 50 basis point cut, Goolsbee called it “a demarcation that we are back to thinking more about both sides of the mandate.”
Goolsbee said “the specific timing of the initial cut is less important than the longer-arc view that conditions are good on both sides of the mandate,” but added, “rates need to come down significantly going forward if we want the conditions to stay that way.”
Responding to questions, Goolsbee sounded even more dovish. Subtracting inflation from the nominal funds rate, he said the real funds rate is “the highest in a very long time.”
“As inflation has come down … we set the rate high and held it there for more than a year,” he continued. “So we were tightening in real terms by not cutting and going along with inflation we were tightening.”
“When inflation is coming in at target, do you want to be the tightest in decades?” Goolsbee asked the Treasurers. “If you’re restrictive for long you’re not going to be at that sweet spot much longer.”
Goolsbee said “50 basis points to start makes sense; it’s a demarcation that we’re shifting back to a dual mandate mode …. not just prioritizing the fight against inflation.”
But the FOMC has barely begun, he suggested. “No doubt about it, we’re hundreds of basis points above the neutral rate…”
“It’s not just one cut,” he said. “If conditions continue like this there are a lot of cuts to come over coming months.”
“Whether the next cut is 25 or 50, over the next 12 months we have a long way to come down to get thje rate to something like neutral to hold conditions where they are,” he added.
Responding to an earlier question about the stance of monetary policy, Goolsbee said, “If I told you inflation is close to where you want it; the unemployment rate is where you want it … does it make sense to have the interest rate at a 20-year high, way above neutral? You would be nervous …. That’s why we have started (cutting).”
Kashkari argued that “because we have made substantial progress bringing inflation back down toward our 2% target and the labor market has softened, the balance of risks has shifted away from higher inflation and toward the risk of a further weakening of the labor market, warranting a lower federal funds rate.”
“While there remain mixed signals about the underlying strength of the U.S. economy and I remain uncertain just how tight policy is, I do believe policy remains tight today,” he continued in a statement released by the Minneapolis Fed.
“Given both the significant progress we’ve made in reducing inflation and also the softening of many labor market indicators, in my judgment the balance of risks has now shifted away from higher inflation toward higher unemployment,” he elaborated. “This could potentially jeopardize achievement of maximum employment.”
“(E)ven after the 50 basis-point cut, I believe the overall stance of monetary policy remains tight,” Kashkari added.
Both Bostic and Kashkari said future rate decisions will be data dependent.
A contrary point of view came from last week’s lone dissenter, Governor Bowman.
Bowman said she agreed on the need to start lowering the funds rate in a Friday statement, but said “a smaller first move in this process would have been a preferable action.”
For one thing, she said, “the U.S. economy remains strong, with solid underlying growth in economic activity and a labor market near full employment.”
What’s more, “despite progress, inflation remains a concern,” she said. “Inflation remains above our 2% goal, as core personal consumption expenditures prices are still rising faster than 2.5% from 12 months earlier.”
Bowman stressed that “accomplishing our mission of returning to low and stable inflation at our 2% goal is necessary to foster a strong labor market and an economy that works for everyone in the longer term.”
“Although it is important to recognize that there has been meaningful progress on lowering inflation, while core inflation remains around or above 2.5%, I see the risk that the Committee’s larger policy action could be interpreted as a premature declaration of victory on our price stability mandate,” she said.
“We have not yet achieved our inflation goal,” Bowman went on. “I believe that moving at a measured pace toward a more neutral policy stance will ensure further progress in bringing inflation down to our 2% target. This approach would also avoid unnecessarily stoking demand.”