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Senior Federal Reserve officials have sought to curb market speculation about impending interest rate cuts by warning that the U.S. central bank needs to see further progress on inflation before considering cutting borrowing costs.
The comments from New York Fed President John Williams and Atlanta's Raphael Bostic – both voting members of the Federal Reserve's FOMC next year – come just days after the Fed triggered a surge in U.S. stocks and bonds, after she signaled she was done with the rate hikes I was now wondering when to start cutting.
“We’re not really talking about rate cuts right now,” Williams said in an interview with CNBC.
“One thing we've learned over the last year is that data can move in surprising ways. We must be prepared to tighten monetary policy further if progress on inflation stalls or reverses,” he said.
Bostic reiterated that message in an interview with Portal on Friday, saying that rate cuts were “not an imminent thing” and that the first cuts could come “sometime in the third quarter” of 2024.
The central bank released forecasts this week showing that Fed officials now foresee cuts worth 0.75 percentage points next year – a quarter point more than they had forecast in September – and a further full percentage point decline in Year 2025.
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Williams, who is a close ally of Fed Chairman Jay Powell, did not say that the current key interest rate of 5.25 to 5.5 percent – a 22-year high – was “sufficiently restrictive” but acknowledged this of impending inflation If the economy is down, unemployment is low and growth is solid, the Fed is likely to be either “at or near” that threshold.
In recent days, the financial markets have increasingly priced in an interest rate cut as early as March and a fall in interest rates of a full percentage point by the end of 2024. The fall in Treasury yields has already reduced the cost of capital and eased financing conditions.
Williams said it was “premature to even think about starting rate cuts in March,” but acknowledged that it was appropriate to cut rates as the economy comes into better equilibrium and inflation continues to fall.
As for his outlook, Bostic said he expects inflation, as measured by the private consumption expenditure price index, to fall to about 2.4 percent by the end of 2024, which would allow the Fed to make two quarter-point interest rate cuts.
Speaking to The Wall Street Journal on Friday, Chicago Fed President Austan Goolsbee was more cautious about the outlook and did not rule out support for a rate cut in March. “It is clear that we are moving more towards a balanced environment and as we do that and inflation falls, we need to think about how restrictive we want to be and what dangers there are on the employment side of the mandate,” he said.
Forecasts released Friday by the Congressional Budget Office, an independent agency, showed the U.S. will avoid a recession next year but output will fall from 2.5 percent in 2023 to 1.5 percent in 2024.
Labor market conditions would weaken and unemployment rise slightly next year, the CBO said, while inflation “continues to slow over the next two years and approaches the Federal Reserve's target rate of 2 percent.”