By Steven K. Beckner
(MaceNews) – After getting off to an aggressive, though belated, start on monetary easing, Federal Reserve officials seem inclined to take a more measured approach going forward.
Policymakers who have spoken over the past week or so have expressed a clear willingness to cut the federal funds rate further from what they regard as a still “restrictive” stance. But there does not appear to be much eagerness to keep taking large bites out of the remaining monetary restraint.
As a group, they seem to want to tailor future rate adjustments depending on what the incoming data on inflation, employment and demand for goods and services say about the balance of risks to the economy. Officials have often said policy is “not on a preset course” in the past, and they are saying it again now, but this time they really seem to mean it.
Unlike previous easing or tightening cycles, when rate moves were sometimes made on a well telegraphed schedule, rate cuts may be much less predictable, at least in the early going.
Since the Fed’s rate-setting Federal Open Market Committee slashed the funds rate by 50 basis points on Sept. 18, one policymaker, Atlanta Federal Reserve Bank President Raphael Bostic, even said he is prepared to “skip” the Nov.6-7 FOMC meeting before cutting rates again.
Aiding this cautious approach is a shared belief that the economy is in “a good place” despite rising unemployment. With inflation having moved closer to the Fed’s 2% target (but still above it) and with the economy still close to full employment, there seems to be no urgency to change monetary policy at a rapid pace.
Though some financial market participants had called for a more modest 25 basis point rate cut, the FOMC decided to reduce the federal funds rate by 50 basis points to a target range of 4.75% to 5.00% in mid-September after leaving it unchanged since last July.
In a rare move, Governor Michelle Bowman dissented in favor of a 25 basis point rate cut, later explaining that she perceived a “risk that the Committee’s larger policy action could be interpreted as a premature declaration of victory on our price stability mandate.”
However, there had been those who had wanted to start cutting rates in July, and subsequent weaker employment data seems to have added to pressure on the FOMC to cut rates by the larger amount in September to make up for the earlier inaction.
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.
The officials 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%). The latter rate coincides with the FOMC’s upwardly revised estimate of the “longer run” funds rate.
The distribution of projections in the FOMC’s “dot plot” showed considerable division among officials. While nine favored cutting the funds rate to a range of 4.25% to 4.5% by the end of 2024, seven favored cutting it to a range of 4.5% to 4.75%.
Minutes of the September meeting, released last week, confirmed such divisions, making the path forward for monetary policy somewhat uncertain and unpredictable. They say that “almost all” agreed that lower employment was a bigger risk than higher inflation, and “almost all” believed that “recalibrating” the funds rate made sense.
In another even split, “some” warned that removing policy restraint “too late or too little could risk unduly weakening economic activity and employment,” while “some” believed “the level of the longer-term neutral rate of interest complicated the assessment of the degree of restrictiveness of policy and, in their view, made it appropriate to reduce policy restraint gradually.”
“Several” said that “reducing policy restraint too soon or too much could risk a stalling or a reversal of the progress on inflation.”
Chair Jerome Powell has set the tone for commentary by his colleagues since the FOMC made the first rate cut since 2020.
In a Sept. 30 speech to the National Association for Business Economics, he said the FOMC was “not in any hurry” to cut rates but would ease as much as necessary to prevent undue economic “pain” while striving to keep reducing the inflation rate to t he Fed’s 2% target.
Powell said the 50 basis point rate cut “reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in an environment of moderate economic growth and inflation moving sustainably down to our objective.,”
While calling both the economy and the labor market “solid,” Powell said, “labor market conditions have clearly cooled over the past year…..We do not believe that we need to see further cooling in labor market conditions to achieve 2% inflation.”
What’s more, “broader economic conditions also set the table for further disinflation,” he said. “The labor market is now roughly in balance.”
Without using the words “soft landing,” but told the NABE the FOMC’s “goal all along has been to restore price stability without the kind of painful rise in unemployment that has frequently accompanied efforts to bring down high inflation.” And he added, “We have made a good deal of progress toward that outcome.”
Powell acknowledged the FOMC has been slow to cut rates, but denied it was “behind the curve” and maintained “that patient approach has paid dividends: Inflation is now much closer to our 2% objective. Today, we see the risks to achieving our employment and inflation goals as roughly in balance.”
With inflation down and unemployment up, “it was time for a recalibration of our policy stance to reflect progress toward our goals as well as the changed balance of risks…,” he said. “(O)ur decision to reduce our policy rate by 50 basis points reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate economic growth and inflation moving sustainably down to 2%.”
Powell said, “if the economy evolves broadly as expected, policy will move over time toward a more neutral stance.”
But, as he has often done, the Fed chief stressed “we are not on any preset course. The risks are two-sided, and we will continue to make our decisions meeting by meeting.”
Powell said the FOMC will be guided by the data. “If the economy slows more, we will cut faster. If it slows less, we will cut slower.”
“It’s not something we need to go fast on,” he said, adding, “we will do what it takes in terms of the speed at which we move .…”
Since Powell spoke, a range of other Fed officials have been certain about only one thing: further rate cuts are coming. But as to the timetable, they have been ambiguous, if not cryptic.
St. Louis Fed President Alberto Musalem said he supported the Sept. 18 rate cut because “monetary policy was and remains moderately restrictive for an economy that
appears close to equilibrium with respect to inflation and employment. The improved outlook
for inflation and cooling of the labor market that occurred over the summer gave me greater
confidence in achieving our dual mandate objectives.”
“I believe it will likely be appropriate to further reduce the target range for the federal funds rate
over time toward a neutral posture, with the size and timing of reductions depending on
incoming data, the evolving outlook and the forward-looking balance of risks around this
outlook,” he continued.
But as for the extent and timing of rate cuts, Musalem resorted to a set of “alternative scenarios” – a popular approach at the U.S. central bank these days.
He said one possibility is that inflation could cease falling toward 2% or even move higher,
perhaps because the economy “responds more vigorously than expected to lower interest rates and easier financial conditions….”
“Should such a scenario arise, with demand increasing at a faster pace than supply, it would be appropriate to maintain a restrictive policy stance with fewer, if any, reductions in the policy rate until such time as inflation does continue to converge,” Musalem told the Money Marketeers of New York University.
Because of that possibility, he said “it is appropriate to withdraw monetary restraint at a pace and magnitude that allow time to evaluate the effects of policy easing.”
In another scenario presented by Musalem, “the labor market softens by more than expected while inflation remains on the path to 2% or falls below it.”
“If that situation were to arise, then it would be appropriate to move the policy rate down more quickly and by a greater amount than my baseline projection,” he said.
Musalem cautioned that “both easing too much too soon, and easing too little too late, can produce costly outcomes,” but he added, “I view the costs of easing too much too soon as greater than the costs of easing too little too late.”
Fed Governor Adriana Kugler sounded somewhat more dovish in a conference at the European Central Bank last Tuesday, saying she “strongly supported” the recent FOMC action because “the combination of significant ongoing progress in reducing inflation and a cooling in the labor market means that the time has come to begin easing monetary policy.”
“Looking ahead, while I believe the focus should remain on continuing to bring inflation to 2%, I support shifting attention to the maximum-employment side of the FOMC’s dual mandate as well,” she continued. “The labor market remains resilient, but I support a balanced approach to the FOMC’s dual mandate so we can continue making progress on inflation while avoiding an undesirable slowdown in employment growth and economic expansion.
“If progress on inflation continues as I expect, I will support additional cuts in the federal funds rate to move toward a more neutral policy stance over time,” Kugler added.
Boston Fed President Susan Collins said, “Recent developments have increased my confidence that inflation will return to the (FOMC’s) 2% target in a timely way – and, crucially, amid a healthy labor market.”
“Looking ahead, preserving the current favorable economic conditions will require
adjusting the stance of monetary policy, so as not to place unnecessary restraint on demand,” she explained. “A careful, data-based approach to policy normalization will be appropriate as we balance two-sided risks and remain highly attentive to both parts of our Congressional mandate – price stability and maximum employment. “
Collins was apprehensive that “with the labor market cooling, and economic growth reverting to a more normal pace, the economy is somewhat more vulnerable to adverse shocks. My confidence in the disinflation trajectory has increased – but so have the risks of the economy slowing beyond what is needed to restore price stability.”
For that reason, she said, the FOMC need to begin “the process of normalizing the policy stance.”
Vice Chair Phillip Jefferson justified the 50 basis point rate cut by saying “the balance of risks to our two mandates has changed—as risks to inflation have diminished and risks to employment have risen, these risks have been brought roughly into balance.”
“The FOMC has gained greater confidence that inflation is moving sustainably toward our 2% goal,” he said, adding that the rate cut was needed “to maintain the strength of the labor market.”
Looking ahead, Jefferson vowed to “carefully watch incoming data, the evolving outlook, and the balance of risks when considering additional adjustments to the federal funds target range…”
Usually hawkish Dallas Fed President Lorie Logan backed the 50 basis point rate cut, but cited a number of economic risks before saying the FOMC should not rush to reduce the fed funds target to a “normal” or “neutral” level but rather should proceed gradually while monitoring the behavior of financial conditions, consumption, wages and prices.”
Logan said “a related upside risk to inflation stems from uncertainty regarding what the “neutral” level of the federal funds rate even is.” Indeed, she said there is reason to believe “the neutral rate may be higher than before the pandemic.”
Logan indicated she’s prepared to support further rate cuts, but in a cautious way: “If the economy evolves as I currently expect, a strategy of gradually lowering the policy rate toward a more normal or neutral level can help manage the risks and achieve our mandated goals.”
“It should go without saying, though, that the future is uncertain,” she continued. “Any number of shocks could influence what that path to normal will look like, how fast policy should move and where rates should settle….”
New York Fed President John Williams took his usual prudent tack. “Looking ahead, based on my current forecast for the economy, I expect that it will be appropriate to continue the process of moving the stance of monetary policy to a more neutral setting over time.”
The FOMC vice chair said “the timing and pace of future adjustments to interest rates will be based on the evolution of the data, the economic outlook, and the risks to achieving our goals. We will continue to be data-dependent and attuned to the evolution of economic conditions in making our decisions.”
For Governor Christopher Waller, it’s a matter of preserving the gains the Fed has made.
“With the labor market in rough balance, employment near its maximum level, and inflation generally running close to our target over the past several months, I want to do what I can as a policymaker to keep the economy on this path.”
“For me, the central question is how much and how fast to reduce the target for the federal funds rate, which I believe is currently set at a restrictive level,” he said.
Waller also presented alternative monetary policy scenarios.
In his first scenario, in which “overall strong economic developments” continue, inflation nears target and the unemployment rate moves up “only slightly,” he said “we can proceed with moving policy toward a neutral stance at a deliberate pace….”
“Another scenario, less likely in light of recent data, is that inflation falls materially below 2% for some time, and/or the labor market significantly deteriorates,” Waller continued. “The message here is that demand is falling, the FOMC may suddenly be behind the curve, and that message would argue for moving to neutral more quickly by front-loading cuts to the policy rate.”
In Waller’s third scenario, inflation “unexpectedly escalates either because of stronger-than-expected consumer demand or wage pressure, or because of some shock to supply that pushes up inflation….. In this circumstance, as long as the labor market isn’t deteriorating, we can pause rate cuts until progress resumes and uncertainty diminishes.”
He added, “Whatever happens in the near term, my baseline still calls for reducing the policy rate gradually over the next year.:”
Finally, San Francisco Fed President Mary Daly, spoke of the need to catch up to disinflation to prevent inadvertent tightening.
She said the FOMC needed to start cutting the funds rate because, with each month of disinflation, “policy became tighter in real terms. So, the FOMC needed to recalibrate…..”
“I see this recalibration as “right-sizing,” recognizing the progress we’ve made and loosening the policy reins a bit, but not letting go,” Daly said. “Even with this adjustment, policy remains restrictive, exerting additional downward pressure on inflation to ensure it reaches 2 percent.:”
Daly said “making these adjustments to match the economy we have is crucial. It prevents the mistake of over-tightening and ensures we are supporting both of our goals.”
“Continued progress is not guaranteed,” she went on. “ We must stay vigilant and be intentional, continually assessing the economy and balancing both of our mandated objectives: fully delivering on 2 percent inflation while ensuring that the labor market remains in line with full employment. That is a soft landing.”