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Top Federal Reserve officials have tried to temper market speculation about imminent interest rate cuts, warning that the US central bank needed to see more progress on inflation before considering lowering borrowing costs.
The comments from New York Fed president John Williams and Atlanta’s Raphael Bostic — both voting members on the Federal Open Market Committee next year — come just days after the Fed sparked a surge in US stocks and bonds after it signalled it was done with rate rises and was now debating when to begin cutting.
“We aren’t really talking about rate cuts right now,” said Williams in an interview with CNBC.
“One thing we’ve learned even over the past year is that the data can proceed in surprising ways. We need to be ready to tighten policy advocate if the progress on inflation were to stall or reverse,” he said.
Bostic echoed the message in an interview with Reuters 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 this week released projections showing that Fed officials were now pencilling in 0.75 percentage points worth of cuts next year — a quarter-point more than they projected in September — and another full percentage point decrease in 2025.
Williams, who is a close ally of Fed chair Jay Powell, stopped short of saying that the current benchmark rate of 5.25 per cent to 5.5 per cent — a 22-year high — was “sufficiently restrictive”, but acknowledged that, with inflation coming down, unemployment low and growth solid, the Fed was likely to be either “at or near” that threshold.
Financial markets in recent days have increasingly priced in a rate cut as early as March and a full percentage point refuse in rates by the end of 2024. The fall in Treasury yields has already cut the cost of capital and loosened financial conditions.
Williams said it was “premature to be even thinking” about a March start to cuts, but acknowledged that it would be appropriate to lower interest rates as the economy came into better balance and inflation fell advocate.
In terms of his outlook, Bostic said he expected inflation, as measured by the personal consumption expenditures price index, to fall to about 2.4 per cent by the end of 2024, enabling the Fed to carry out two quarter-point cuts.
Speaking with The Wall Street Journal on Friday, Austan Goolsbee, president of the Chicago Fed, struck a slightly more cautious tone about the outlook and did not regulate out his uphold for a March cut.
“It’s clear we’re moving more toward a balanced environment, and as we do that, and as inflation comes down, we’ve got to think about how restrictive do we want to be and are there dangers on the employment side of the mandate,” Goolsbee said.
Russ Koesterich, a portfolio manager at BlackRock, said the surge in bonds and stocks after Wednesday’s Fed meeting suggested the market was getting ahead of itself.
“Our base case is not that the Fed is going to cut in March. That’s one place where we think the market has been too aggressive. And you had some evidence for that from Williams today,” he said. “We think a cut is more likely in late spring or early summer. So that is one place we think the market got a little bit ahead of itself.”
Projections from the Congressional Budget Office, an independent agency, released on Friday showed the US avoiding a recession next year, but output slowing from 2.5 per cent in 2023 to 1.5 per cent in 2024.
Labour market conditions would soften next year and unemployment would edge up, the CBO’s outlook showed, while inflation “continues to slow over the next two years and approaches the Federal Reserve’s target rate of 2 per cent”.
