By Steven K. Beckner
(MaceNews) – Two Federal Reserve Bank presidents reinforced the growing consensus that the Fed will not be lowering short-term interest rates any time soon Thursday.
John Williams, one of the Fed’s most important monetary policymakers as president of the Federal Reserve Bank of New York, said the Fed’s policymaking Federal Open Market Committee will “eventually” cut the federal funds rate, but said he does not see “any urgency” to do so.
The FOMC vice chairman didn’t even rule our raising interest rates if the inflation data were to dictate such a monetary policy “adjustment.”
Williams observed that the economy remains strong despite the Fed’s 525 basis points of rate hikes since March 2022, implying that the Fed’s rate settings are not as “restrictive” as Chair Jerome Powell has repeatedly portrayed them as being.
Atlanta Fed President Raphael Bostic, a voting member of the FOMC, advocated “patience” and said he sees no rate cuts until late this year.
The Williams and Bostic comments come less than two weeks before the FOMC meets to take fresh stock of economic and financial conditions and set interest rates. And they come in wake of data that not only show inflation running at 3 ½% or more in the first quarter, but also labor markets remaining tight and strong consumer spending propelling GDP growth at a pace well in excess of the Fed’s estimated “longer run” potential.
At its March 19-20 meeting, the FOMC left the funds rate in a 5.25% to 5.50% target range and reiterated 2024 projections for three 25 basis point rate cuts, but declared, “the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
Since then, rate cuts hopes have dimmed. Earlier this year, financial markets were expecting the FOMC to start reducing the funds rate in May and to cut it at least six times this year. But as disappointing inflation and other data forced Fed officials to reassess prospects for lowering inflation to 2%, rate cut forecasts have been delayed and diminished. Wall Street Fed watchers now believe the Fed will delay the start of rate cuts until September or even beyond.
In a significant departure Tuesday, Powell seemed to confirm reduced expectations for monetary easing by saying, “the recent data have clearly not given us greater confidence” that inflation is headed toward the 2% target. On the contrary, he said, recent data suggest “it is likely to take longer than expected to achieve that confidence.”
“Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us,” he added in what was widely seen as a capitulation to the reality of persistent inflation.
Earlier, Vice Chair Philip Jefferson also signaled a cautious, wait-and-see approach to easing. “My baseline outlook continues to be that inflation will decline further, with the policy rate held steady at its current level …. (T)he outlook is still quite uncertain, and if incoming data suggest that inflation is more persistent than I currently expect it to be, it will be appropriate to hold in place the current restrictive stance of policy for longer.”
Some officials, notably Minneapolis Fed President Neel Kashkari, have mused that it may not be appropriate to cut rates at all this year.
Williams did not go that far at a Semafor World Economy Summit, but his open-ended remarks suggested that he does not feel bound by previous FOMC rate cut projections.
Williams said he still sees the Fed wanting to cut rates “eventually,” but gave no time frame or preferred amount of rate cuts. He didn’t even rule out higher rates, although he said that’s not his “base case.”
For now, he said monetary policy is “in a good place.”
Williams pointed to strong GDP and job growth and to positive supply side developments, particularly in the labor market. He said, “we’re seeing imbalances come down.”
He also said, “we’re seeing inflation come down,” but said “we have more work to do.” Lately, he noted, inflation has been “on a little bit of a bumpy road” – an obvious reference to the January through March data which showed inflation averaging over 3%.
So, he said the Fed will “eventually lower interest rates as inflation gets to 2%,” but he added, “I definitely don’t see any urgency to cut rates.”
“My expectation is, as inflation gets all the way to 2% on a sustained basis, as the economy is in good balance, interest rates will need to be lower at some point,” he said, but “the timing of that is driven by the economy.”
Other Fed officials have lately said that the economy’s stronger than expected performance shows that monetary policy is not as “restrictive” as heretofore believed. Williams did not explicitly echo that sentiment, but pointed to strong GDP growth, job gains and 3.8% unemployment as evidence that the Fed’s monetary tightening has not hurt the economy.
“We have a strong economy, we want a strong economy, that’s all very good news, but it also means that the rates that we have haven’t caused the economy to slow too much,” he said.
Throughout last year, Powell and others often stated that achieving 2% inflation goal would likely require “below potential” (1.8%) GDP growth and some “softening” of labor market conditions, although they have also expressed hope that the economy could achieve a “soft landing.”
Asked if the Fed might actually need to raise rates to get inflation down Williams replied, “That’s not my base case,” but “it’s hard to predict the future …. We will adjust our policy to meet our goals .…
“If the data tell us we need higher interest rates to achieve our goals, then obviously we would want to do that,” he added.
He said the Fed’s job is to “make sure supply and demand are in balance.”
Asked if the Fed might abandon its 2% inflation goal, Williams replied with “one word: No.”
“The 2% goal is very important,” he went on. “It’s important not only to have that goal but to actually achieve it to reinforce that credibility.” He claimed the Fed’s commitment to 2% inflation as an objective has helped keep inflation expectations under control.
Bostic, speaking at a forum sponsored by the Greater Fort Lauderdale (Florida) Alliance, also stressed the need to reduce inflation to 2% and advocated “patience” in getting there.
He observed that inflation has been falling, but not as rapidly as hoped, and he said he’s “okay with that” as long as “the economy is producing a lot of jobs.”
Bostic said the Fed’s “restrictive stance will slow us down and get us to 2%.,” but added, “I’m not in mad dash to be there.”
He said he will “be patient” and watch both sides of the Fed’s dual mandate of maximum employment and price stability.
As for the funds rate level, Bostic said, “I’m happy to just stay where we are.”
In Bostic’s view, the FOMC “won’t be in position to lower our rates until toward the end of this year.”
He said he does not foresee a recession.