– Harker Still Sees Rates Heading Lower; But Now ‘Appropriate To Take A Pause’
– Collins Calls for ‘Patient Approach to Policy’; Cuts Could Go Faster or Slower
– Schmid: Funds Rate May Already Be ‘Neutral;’ Favors Further Balance Sheet Shrinkage
– Bowman Urges ‘Caution;’ Monetary Policy Not As Restrictive As Some Think
By Steven K. Beckner
(MaceNews) – Federal Reserve officials continued to step lightly in talking about the outlook for the U.S. economy and monetary policy Thursday, leaving uncertain the size and timing of additional short-term interest rate reductions.
Collectively, Fed policymakers seem to be showing little inclination to cut interest rates again when their Federal Open Market Committee convenes later this month — not surprisingly, given the ostensible pause signals sent by the FOMC and Chairman Jerome Powell last month.
At the same time, though, most Fed officials do seem to lean strongly toward a resumption of monetary easing at some point, perhaps in March.
Philadelphia Federal Reserve Bank President Patrick Harker said he sees the Fed remaining on “a downward policy rate path,” but “the exact speed” of rate-cutting will depend on the data. For now, he said “it’s appropriate to take a pause,” though probably not “a long pause.”
Boston Fed President Susan Collins, who will be an FOMC voter this year, callled for “a patient approach to policy” and allowed for either quicker or slower rate cuts.
Kansas City Fed President Jeff Schmid, another 2025 voter, sounded less inclined than others to back further rate cuts, based on his belief that the current federal funds rate setting may already be close to “neutral,” and that is where he thinks monetary policy should be in the current economy.
He described himself as favoring a “gradual” and “patient” strategy.
Fed Governor Michelle Bowman, who has also tended to be be on the “hawkish” end of the policy spectrum, likewise urged the Fed to be “cautious” about further rate cuts. After a full percentage point of funds rate reductions, she maintained that monetary policy “may not be as restrictive as others may see it.”
On Dec. 18, the Fed’s policy-making Federal Open Market Committee completed 100 basis points of easing by cutting key federal funds rate by 25 basis points to a target range of 4.25% to 4.5%. — a median 4.4%.
The 19 FOMC participants halved their projections for rate cuts in the new year from four to two. In their revised, quarterly Summary of Economic Projections, they project the funds rate will end 2025 at a median 3.9% (a target range of 3.75-4.0%) — 50 basis points higher than in the September SEP.
In its policy statement, the FOMC signaled that further cuts in the funds rate are likely to be more limited, and Chairman Jerome Powell reinforced the impression by saying the FOMC would be proceeding “slowly” and “cautiously” as they seek to balance their goals of “maximum employment” and returning to “price stability.”
Minutes of the mid-December meeting, released Wednesday, confirmed that most FOMC participants were predisposed to pause rate cuts.
“Participants indicated that the Committee was at or near the point at which it would be appropriate to slow the pace of policy easing,” the minutes disclose, adding that “if the data came in about as expected, with inflation continuing to move down sustainably to 2% and the economy remaining near maximum employment, it would be appropriate to continue to move gradually toward a more neutral stance of policy over time.”
The minutes say “some” officials thought “the policy rate was now significantly closer to its neutral value” after 100 basis points of easing, and say “many participants suggested that a variety of factors underlined the need for a careful approach to monetary policy decisions over coming quarters.”
“A substantial majority of participants observed that, at the current juncture, with its policy stance still meaningfully restrictive, the Committee was well positioned to take time to assess the evolving outlook for economic activity and inflation, including the economy’s responses to the Committee’s earlier policy actions,” the minutes add.
The FOMC’s first meeting of 2025 will be January 28-29.
Harker, who will retire at mid-year, has been among the more dovish officials of late, but on Thursday he was speaking more tentatively, saying he favors further rate reductions, but “remain(s) cautious of possible upside influences on policy.”
“I still see us on a downward policy rate path,” he told the National Association of Corporate Directors in Princeton, New Jersey. “Looking at everything before me now, I am not about to walk off this path or turn around.”
“But the exact speed I continue to go along this path will be fully dependent upon the incoming data,” he continued in prepared remarks. “Keep in mind, a projection is, well, only a projection. It’s not a promise.”
“So, at this moment, I’m still just putting one foot in front of the other,” Harker added.
Responding to questions, Harker said, “it’s appropriate to take a pause right now and see how things shake out … not a long pause necessarily.”
“We can stay where we are for a little bit – probably not for long, but we’ll have to see… we have to let the data play out to see what happens,” he added.
Harker echoed the uncertainty, if not unsettledness, expressed by other Fed officials, particularly with regard to employment. “(T)he overall underpinnings of our economy remain strong. But we remain in very unsettled times and there remain,”
“I am going to keep a close watch on the data to glean whatever nuances I can….,” Harker said. “(I)n the overall we are still creating jobs, maybe just not at the pace of the past couple of years…..”
Among the uncertainties facing the FOMC, Harker said, is the level of the “neutral” funds rate, composed of the 2% inflation target plus an imagined “real” rate or “r*.”
But he was agnostic. Once thought to be 50 basis points or even lower, r* (and in turn the nominal neutral rate)
R* was once thought to be 50 or even less, but “some are now arguing that it may be higher,” he noted, but “we don’t’ know that for sure.”
“Given all that, we just have to be cautious,” Harker went on. The FOMC has to “act now on what we know, not guess on what r* is going to be…It’s unknowable…We can’t estimate it a priori.”
An added complication is that long-term rates in the bond market have been climbing despite Fed rate cuts. Harker said “we have to be humble about what we can and cannot do.. we can’t control that end of the curve … . When you move the short end, you expect the long end to respond, but not if other factors are working in opposition.”
Meanwhile, Collins also spoke cautiously and contingently in remarks to the NAIOP in Boston.
She defended her vote for last September’s 50 basis point rate cut as “fully appropriate – given the significant, if bumpy, progress on inflation.”
“The adjustment recognized that there was no need for further cooling of the no-longer-overheated labor market; that a given nominal policy rate would become increasingly restrictive as inflation came down; and that as the pace of growth moderates, the economy can be more vulnerable to adverse shocks.”
Collins, who will be voting this year, described the December rate cut decision was “a closer call, but said it “provided some additional insurance to preserve healthy labor market conditions while maintaining a restrictive policy stance that is still needed to sustainably restore price stability.”
Going forward, she said her policy outlook is “broadly in line with the median forecast” in the S.E.P. – that is to say two 25 basis point cuts in 2025.
“In particular, I expect inflation in 2025 to run somewhat higher than I previously thought, with the risks likely having shifted to the upside,” she explained. “Inflation, while notably closer to the 2% target, has proved “stickier” than anticipated.”
But Collins said “it is too early to tell how future policy changes by the new administration and Congress might influence the trajectories of inflation and economic activity.”
And she added that “it will take some time for the effects of our monetary policy actions to filter through to the economy.”
What’s more, while calling the labor market “healthy,” Collins said she intends to “watch for possible fragilities, remaining attentive to both sides of our dual mandate, and recognizing risks to both inflation and employment.”
Collins said “this context calls for a patient approach to policy – taking the time to fully assess available information and not over-reacting to individual data readings, as we calibrate policy meeting by meeting.”
She said “this likely implies a more gradual approach to policy normalization.”
Like others, Collins allowed for an acceleration or deceleration of monetary easing depending on the circumstances. “Policy is well positioned to adjust as required to evolving conditions – holding at the current level for longer if there is little further progress on inflation, or easing sooner if the need arises.”
In other comments, Harkin vowed the Fed “will not issue a central bank digital currency unless Congress directs us to do so … . We’re not anywhere close (to launching CBDC).”
Later Thursday, Schmid took a more hawkish position than others in remarks to the Economic Club of Kansas City, strongly suggesting that he would hesitate to cut rates much further, if at all.
“With inflation close to target and growth showing continued momentum, I believe we are near the point where the economy needs neither restriction nor support and that policy should be neutral,” he said. “This partly reflects the easing the Fed has already done, having lowered the policy rate by a full percentage point since September.”
Addressing the question of whether the current funds rate target range of 4.25-4.50% is “restrictive” or “neutral,” he reiterated an argument he made in November — that “there are many good reasons to expect that interest rates might settle at a higher neutral rate than we saw before the pandemic.”
Besides, Schmid said federal fiscal policy is elevating the entire rate structure. “More concerning, interest rates could also settle higher on account of the continued deterioration of the U.S. fiscal position and an abundance of Treasury borrowing that needs to be financed.”
“My read is that interest rates might be very close to their longer-run level now,” he continued. “Regardless, I am in favor of adjusting policy gradually going forward and only in response to a sustained change in the tone of the data.”
“The strength of the economy allows us to be patient,” Schmid added.
In response to a question about getting inflation down to 2% from 2 ½%, Schmid said that may not be achieved until 2026.
Although inflation has been brought down considerably from a peak above 9%, he said “here’s still work to be done,” but he said “it almost seems more difficult” to get it all the way to 2%.
Citing a “friction” between the Fed’s dual mandate goals of maximum employment and price stability, Schmid said the Fed wants to get inflation down to 2%, but in the process “not to unnecessarily create volatility in the economy …. .You do try not to break things as we striye to get the inflation factor down to two.”
He prefaced those comments by observing that, “we are a lot closer than we were two-and-a-half years ago when inflation was at a 40-year high, and I am fairly optimistic that inflation will continue to move in the right direction.”
“As the labor market has loosened, inflation has fallen,” he said, adding that inflation expectations “have remained anchored at a level consistent with 2 percent inflation.”
Schmid emphasized that, although inflation has come down “following a rapid tightening of monetary policy, it is essential that the Fed remain vigilant and maintain this hard-fought credibility.”
Looking at the other side of the Fed mandate, Schmid said he is “optimistic about employment and the strength of the economy. Though the job market has loosened, it remains healthy …. . The unemployment rate has inched up but remains low.”
In other comments, Schmid said one of his new year resolutions is to “reduce the Fed’s footprint in financial markets.”
In pursuit of that resolution, he advocated continued shrinkage of the Fed balance sheet at a time when most of the speculation has been about when the Fed will desist from doing so.
“For over two years the Fed has been shrinking its balance sheet,” he noted. “Substantial progress has been made, with the size of the Fed’s asset holdings declining by about $2 trillion from its peak. However, I would like to see even further declines this year.”
Also, I would prefer that we move towards holding only treasuries in our portfolio in line with previous communications from the FOMC.
We should minimize our impact on relative asset prices. Currently, this means moving out of mortgage-backed securities. Even more emphatically, I would strongly oppose using our balance sheet to intervene in any other asset classes.
During the Q&A session, Schmid noted that “some would argue that we should discontinue runoff,” but he said “that would not be a favorable thing in my opinion..”
Bowman, who voted with the FOMC majority in favor of the Dec. 18 rate cut after dissenting against the September cut, took a similar approach to the funds rate.
“Looking ahead, we should be cautious in considering changes to the policy rate as we move toward a more neutral setting,” she told the California Bankers Association. “Future actions should be based on a careful assessment of ongoing and sustained progress in achieving our goals, and we must be clear in our communication about how further changes are intended to affect economic conditions.”
Bowman said she continues to be “concerned that the current stance of policy may not be as restrictive as others may see it. Given the ongoing strength in the economy, it seems unlikely that the overall level of interest rates and borrowing costs are providing meaningful restraint.”
“With equity prices more than 20 percent higher than a year ago, easier financial conditions may be contributing to the lack of further progress on slowing inflation,” she continued. “In fact, concerns about inflation risks seem to partly explain the recent notable increase in the 10-year Treasury yield back to values last seen in the spring of 2024.”
“In light of these considerations, I continue to prefer a cautious and gradual approach to adjusting policy,” she added.
Although some officials have speculated that Trump tariff and other policies could adversely affect the economy, Bowman warned, “We should also refrain from prejudging the incoming administration’s future policies. Instead, we should wait for more clarity and then seek to understand the effects on economic activity, the labor market, and inflation.”
Thursday’s flood of Fedspeak continued was largely consistent with previous new year commentary.
On Wednesday, Gov. Christopher Waller said he “will support continuing to cut our policy rate in 2025,” assuming the economy performs as he expects, with the exact number of rate cuts depending on incoming data.
His expectation, as he explained, is for continued “solid” economic growth; employment “near” the Fed’s “maximum-employment objective,” and disinflation resuming.
Regarding the latter, Waller said he “believe(s) that inflation will continue to make progress toward our 2% goal over the medium term and that further reductions will be appropriate.” He cited a number of factors that “should result in a significant step-down in the 12-month inflation numbers through March.”
Waller, speaking to the Organization for Economic Cooperation and Development in Paris, was vague about how many additional rate cuts he thinks will be appropriate, but suggested he is open to lowering the funds rate more than the 50 basis points projected in December.
“The pace of those cuts will depend on how much progress we make on inflation, while keeping the labor market from weakening,” he said. “Based on the most recent Summary of Economic Projections, the median of policymakers’ expected appropriate policy rate this year implies two 25 basis point cuts.”
“But the range of views is quite large, from no cuts to as many as five cuts for different FOMC participants,” he continued. “As always, the extent of further easing will depend on what the data tell us about progress toward 2% inflation, but my bottom-line message is that I believe more cuts will be appropriate.”
Waller downplayed potential inflationary implications of the higher tariffs which the incoming Trump administration might impose. “If, as I expect, tariffs do not have a significant or persistent effect on inflation, they are unlikely to affect my view of appropriate monetary policy.”
Addressing Western central banks at large, Waller advised “sticking to our mandates and resisting the temptation to go beyond them ….” because seeing risks clearly is “hard,” he added, “We need to remain focused.”
“We also need to be nimble in responding to unfamiliar risks and be prepared to use our monetary policy tools in new ways to prepare for unprecedented challenges that may present themselves,” he went on, “When conditions are uncertain, as they often are, we must move deliberately but also be ready to act quickly and decisively when the situation demands it…”
Waller stressed the need for central banks to retain their “credibility,” saying “this is most effectively maintained when monetary policy decisions are made according to our mandates.”
Earlier in the week, Fed Governor Lisa Cook said the Fed “can afford to proceed more cautiously with further cuts,” given lower inflation and still “solid” (though cooler) labor markets.
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