By Rich Miller, Catarina Saraiva, and Steve Matthews
Three top Federal Reserve officials hammered home the message Thursday that the US central bank is still on track to cut interest rates this year — just not anytime soon.
Fed Vice Chair Philip Jefferson and Governor Lisa Cook said they’re optimistic inflation is still cooling despite a blip in January, but made clear they want more evidence it’s headed back to their 2% target before lowering borrowing costs.
“At some point, as we gain greater confidence that disinflation is ongoing and sustainable, that changing outlook will warrant a change in the policy rate,” Cook said at an event at Princeton University.
Jefferson agreed rate cuts this year are likely, but said that officials need to be on guard against reducing them too much in response to easing price pressures.
“Excessive easing can lead to a stalling or reversal in progress in restoring price stability,” he said in a speech at the Peterson Institute for International Economics.
Speaking later Thursday, Governor Christopher Waller said January’s jump in consumer prices warrants caution in deciding when to start cutting rates, though he still expects reductions to begin later this year.
“The strength of the economy and the recent data we have received on inflation mean it is appropriate to be patient, careful, methodical, deliberative – pick your favorite synonym,” Waller said at a speech in Minneapolis. “Whatever word you pick, they all translate to one idea: What’s the rush?”
The remarks echo recent comments from Chair Jerome Powell and others, who generally concur that rates likely are at a peak but don’t seem to be in a rush to reduce them. Powell told reporters following the Fed’s Jan. 30-31 meeting that a rate cut at the central bank’s gathering next month was unlikely.
As recently as mid-January, investors and some economists were betting on the Fed to start lowering rates at its March 19-20 meeting. Markets have since significantly dialed back expectations for early and rapid cuts, shifting wagers on the first move to June or July on the heels of reports showing job and price gains well above forecasts in January.
Philadelphia Fed President Patrick Harker said at a separate event Thursday that cutting rates too soon could unwind progress made on inflation, and that he wants to see more evidence that price pressures are broadly easing.
“I believe that we may be in the position to see the rate decrease this year,” Harker, who doesn’t vote on policy decisions this year, said in Newark, Delaware. “But I would caution anyone from looking for it right now and right away.”
Still, Harker said he wouldn’t take the possibility of a rate cut in May off the table, adding, “Just give us a couple meetings.”
Patient Approach
The patient approach by policymakers has been largely validated by data released in recent weeks. The consumer price index rose by more than forecast in January, and prices paid to US producers also climbed. As a result, economists forecast the Fed’s preferred gauge of underlying inflation to rise at the fastest pace since early 2023 when it’s released next week.
The jobs market, meanwhile, has remained robust, with employers boosting payrolls in January by the most in a year while unemployment hovers around multi-decade lows, at 3.7%.
Waller, who was nominated by President Donald Trump and whose views are seen by investors as influential, said there’s “no great urgency” to ease policy given strength in the economy and labor market.
“My conjecture is that, in the absence of a major economic shock, delaying rate cuts by a few months should not have a substantial impact on the real economy in the near term,” he said at the University of St. Thomas’ business school in Minneapolis.
But Jefferson cautioned that the labor market could deteriorate quickly and that the Fed must be vigilant as a result. And Cook warned of the risk that slowing demand could prompt companies to start laying off more workers, and “lead to a much more pronounced rise in unemployment than we have seen so far.”
Jefferson and Cook — both of whom were nominated by President Joe Biden — said they had been surprised by the strength of consumer demand last year, but said they expect it to slow in 2024 as high rates continue to weigh on households.
“Savings built up during the pandemic are diminishing, especially for those with low or moderate incomes,” Cook said. “Some measures of credit use, such as credit card and buy-now-pay-later use and the share of households carrying a credit card balance, have risen above their pre-pandemic levels.”
Jefferson said he saw three key risks to the outlook. Consumer spending could prove more resilient than he expects, stalling progress on inflation. Oil and other commodity markets could be roiled by a widening of the conflict in the Middle East. Employment could weaken as growth fades.