–Updates with comments from Fed Gov. Waller
By Steven K. Beckner
(MaceNews) – The Federal Reserve should be in no rush to resume interest rate reductions as it focuses on lowering inflation, so long as the labor market remains “solid,” Fed officials concurred Monday.
As they have done since the the Fed’s rate-setting Federal Open Market Committee lowered the key federal funds rate on Dec. 18, officials emphasized “elevated” inflation while downplaying risk on the “maximum employment” side of the Fed’s “dual mandate.”
Fed Governor Michelle Bowman urged that the Fed be “patient” and wait for further evidence that inflation is headed down to its 2% target, warning of “upside risks” to inflation.
Philadelphia Federal Reserve Bank President Patrick Harker has a reputation for being considerably more dovish than Bowman but he too advocated “holding the policy rate steady” in a “restrictive” stance to combat inflation in what he sees as a strong economy.
Fed Governor Christopher Waller, speaking later Monday in Australia, held out hope for a resumption of rate cuts, but said he favors a “pause” until such time as disinflation resumes.
The FOMC cut the federal funds rate three times from September to December last year, but left it unchanged in a target range of 4.25% to 4.5% on Jan. 29, while continuing to shrink the Fed’s balance sheet.
After the Jan. 28-29 meeting, Chair Jerome Powell said the FOMC had decided that, after 100 basis points of rate cuts, “it’s appropriate we do not be in a hurry to make further adjustment.” He said much the same again last week in two days of testimony on the Fed’s semi-annual Monetary Policy Report to Congress.
Most recent data have tended to confirm market sentiment that the Fed will remain on hold for the near future and perhaps cut the funds rate only once later in the year, although there have been hints of softness in economic activity amid heightened policy uncertainty early this year as Donald Trump took office for a second term as president.
Last week, the Labor Department released further evidence that inflation continues to run persistently above the Fed’ 2% target. Its consumer price index accelerated in January to an increase of 0.5% or 3.0% from a year earlier, while the core CPI climbed 0.4% or 3.3% year over year. In December, the Fed’s preferred inflation gauge, the Commerce Department’s price index for personal consumption expenditures (PCE) rose 2.6% from a year earlier, while the core PCE was up 2.8%.
Meanwhile, there were few signs of the “unexpected weakness” in the labor market which Powell had said might force the Fed to ease monetary policy. The unemployment rate fell from 4.1% to 4.0% in January. Non-farm payrolls grew a less than expected 143,000, but prior months job gains were revised up by 100,000. Average hourly earnings grew a faster 0.5%, leaving them up 4.1% from a year earlier – up from 3.9% in December.
Both retail sales and industrial production slid in January, but real GDP has been expanding by 2 ½% annually – well above the Fed’s 1.8% estimate of its longer run potential, noninflationary growth pace.
Bowman made clear she sees no need for further rate cuts for the foreseeable future in an address to an American Bankers Association conference on community banking.
She voted against the FOMC’s initial 50 basis point rate cut on Sept. 19 but voted for the next two 25 basis point reductions. She voted to keep the funds rate unchanged on Jan. 29 and suggested it should remain on hold for an indefinite period.
“I think that policy is now in a good place, allowing the Committee to be patient and pay closer attention to the inflation data as it evolves,” she said.
“In my view, the current policy stance also provides the opportunity to review further indicators of economic activity and get further clarity on the administration’s policies and their effects on the economy,” Bowman continued. “It will be very important to have a better sense of these policies, how they will be implemented, and establish greater confidence about how the economy will respond in the coming weeks and months.”
The U.S. economy doesn’t need additional stimulus in Bowman’s view. “For now, the U.S. economy remains strong, with solid growth in economic activity and a labor market near full employment.”
Bowman expressed hope that “still somewhat elevated” core inflation “will moderate further this year,” but she warned, “there are upside risks to my baseline expectation for the inflation path.”
Since 2023’s “significant” inflation drop, “it has taken longer to see further meaningful declines,” she said, adding that the January CPI and PPI suggest that the core PCE likely rose 2.6% on a year-over-year basis last month.
“Progress had been especially slow and uneven since the spring of last year mostly due to rising core goods price inflation,” she said.
Meanwhile, she indicated she is more worried about upward pressure on labor costs than about job growth or availability, saying, “the labor market no longer appears to be especially tight, but wage growth remains somewhat above the pace consistent with our inflation goal.”
“The recent revision of the Bureau of Labor Statistics labor data further vindicates my view that the labor market was not weakening in a concerning way during the summer of last year…..,” she went on, although she said she “remain(s) cautious about taking signal from only a limited set of real-time data releases.”
If the economy evolves as she expects, Bowman said she thinks “inflation will slow further this year,” but she said, “its progress may be bumpy and uneven, and progress on disinflation may take longer than we would hope.”
“I continue to see greater risks to price stability, especially while the labor market remains strong,” she added.
So, Bowman re-emphasized her “patient” approach to monetary policy.
“Having entered a new phase in the process of moving the federal funds rate toward a more neutral policy stance, there are a few considerations that lead me to prefer a cautious and gradual approach to adjusting policy, as it provides us time to assess progress in achieving our inflation and employment goals,” she said.
Although Powell and others have described the funds rate setting as “restrictive,” Bowman said, “easier financial conditions from higher equity prices over the past year may have slowed progress on disinflation.”
Higher bond yields would seem to point in the other direction, but Bowman noted that “some have interpreted it as a reflection of investors’ concerns about inflation risks and the possibility of tighter-than-expected policy that may be required to address inflationary pressures.”
After downplaying employment concerns, Bowman stressed, “there is still more work to be done to bring inflation closer to our 2% goal.”
“I would like to gain greater confidence that progress in lowering inflation will continue as we consider making further adjustments to the target range,” she continued. “We need to keep inflation in focus while the labor market appears to be in balance and the unemployment rate remains at historically low levels.”
Bowman noted that before its March 18-19 meeting, the FOMC will have received an additional month of inflation and employment data.
Earlier Monday morning, Harker echoed others in advocating a patient approach, without using that word.
The FOMC’s three rate cuts – 50 basis points in September, 25 basis points and a final 25 basis points in December – constituted a “recalibration” that “left policy in good position for the road ahead,” he told a Global Interdependence Center conference, adding, “We will remain data dependent, looking for the underlying conditions, and making decisions based on our best assessment of the outlook and risks.”
Pointing to the unsatisfactory January inflation data, Harker conjectured that “seasonal adjustments are struggling to keep up with a fast-changing economy, and we need to parse the underlying trends from the month-to-month noise.”
But he acknowledged that “inflation has remained elevated and somewhat sticky over the past several months, both in the overall and core figures.”
Harker, who will be retiring at the end of June, said he believes “our current positioning will bring inflation back to target, in the next two years if conditions broadly evolve as I expect,” but he said the FOMC should keep monetary policy “restrictive” to ensure that outcome.
“We need to continue letting monetary policy do its work and letting the data roll in,” he said, adding that “there are also upside risks which we cannot easily dismiss….”
Harker suggested there is no need for monetary easing at this juncture: “All in all, the current data paints a picture of an American economy that continues to function from a position of strength.”
“Inflation is still elevated and the mission is not yet accomplished — but I am encouraged both by the longer-view, which clearly points to disinflation in the last two years, and the zoomed-in view, seeing key categories like shelter move in the right direction. GDP and production remain resilient,” he continued. “Labor is largely in balance.”
“And these are reasons enough for holding the policy rate steady,” Harker added.
Waller called recent inflation data “disappointing,’ and while musing that “residual seasonality” may explain the worse than expected CPI report, said he needs to be convinced that inflation is headed to 2% before supporting further rate cuts.
“If this winter-time lull in progress (against inflation) is temporary, as it was last year, then further policy easing will be appropriate. But until that is clear, I favor holding the policy rate steady.” he said in remarks prepared for delivery at the University of New South Wales in Sydney, Australia.
Waller said he “felt it was prudent to stand pat at our January meeting,” and he added, “Given last week’s inflation report, that concern was warranted.”
And he indicated that it will take some convincing inflation data to the contrary for him to change his mind.
“The labor market is balanced and remarkably resilient,” Waller observed, adding, “If you want an example of a stable labor market with employment at its maximum level, it looks a lot like where we are right now.”
Meanwhile, on the other side of the Fed’s dual mandate, “inflation is still meaningfully above our target, and progress has been excruciatingly slow over the last year,” he continued.
Waller said “we have made some progress over the past year (on the inflation numbers), but they are still too high.” As for wages, he noted thaey’ve been growing twice as fast as the inflation target, but said, “unless that (faster) productivity trend changes a lot, wage growth is consistent with bringing inflation down to 2 percent.”
Taking inflation and labor market conditions together, Waller said, “we should currently have a restrictive setting of policy, as we do—to continue to move inflation down to our goal—but that setting should be getting closer to neutral as inflation moves closer to 2% and should allow the labor market to remain in a good place.”
“So for now, I believe a pause in rate cuts is appropriate,” he went on. “Assuming the labor market continues to be in rough balance, I can wait and see if the higher inflation readings in January moderate, as they have in the past couple of years…..”
Inflation may or may not be bulging due to seasonal adjustment factors, he said, but “whichever case it may be, the data are not supporting a reduction in the policy rate at this time.”
“But if 2025 plays out like 2024, rate cuts would be appropriate at some point this year,” Waller added.
Regarding Trump tariff and other policies, Waller said the Fed cannot base monetary policy decisions on hunches about how those other policies might impact the economy. But he said his “baseline view is that any imposition of tariffs will only modestly increase prices and in a non-persistent manner. So I favor looking through these effects when setting monetary policy to the best of our ability.”