Fed officials leave door open to another large rate cut
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A handful of Federal Reserve officials left open the door to additional large interest rate cuts, noting that current rates still weigh heavily on the US economy.
PHOTO: REUTERS
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WASHINGTON - A handful of US Federal Reserve officials on Sept 23 left open the door to additional large interest rate cuts, noting that current rates still weigh heavily on the US economy.
“Over the next 12 months, we have a long way to come down to get the interest rate to something like neutral to try to hold the conditions where they are,” Chicago Fed president Austan Goolsbee said in a moderated question and answer event.
Neither Dr Goolsbee nor any of his colleagues said they already favour repeating the half-point cut made by the central bank on Sept 18, saying incoming data would guide their decision-making.
The Federal Open Market Committee (FOMC) next meets just after the US presidential election, on Nov 6-7.
The Chicago Fed chief said he estimates that the central bank’s current benchmark interest rate is “hundreds” of basis points above neutral, the level at which policy neither stimulates nor restricts economic growth. The neutral rate cannot be directly measured, only estimated.
Dr Goolsbee, who sounded more strident than other officials in calling for lower borrowing costs, emphasised that employment conditions and inflation were each at favourable levels, but would not remain so unless the Fed lowered rates “significantly” in the coming months.
Dr Goolsbee, Atlanta Fed president Raphael Bostic and Minneapolis Fed president Neel Kashkari all said on Sept 23 that they supported the decision taken by Fed officials last week to lower their benchmark rate by half a percentage point to a range of 4.75 per cent to 5 per cent.
Dr Bostic, while decidedly more cautious than Dr Goolsbee over how quickly the Fed should cut, also nodded to the room that the Fed likely has to lower rates before it might reach neutral.
“I don’t know anyone who would plausibly argue with the notion that we are a fair distance above it,” he said during a virtual event organised by the European Economics and Financial Centre.
He said uncertainty over both inflation and employment should rule out any potential for cutting by more than half a point at a time.
While he did not comment directly on whether he would support another half-point cut, Dr Bostic warned against assuming last week’s move would be repeated.
But, he added: “Any further evidence of material weakening in the labour market over the next month or so will definitely change my view on how aggressive policy adjustment needs to be”.
In an interview with CNBC following the release of his essay, Mr Kashkari said he favours cutting rates by a quarter-point at each of the central bank’s two remaining meetings in 2024.
Two other Fed officials weighed in on Sept 23, including governor Christopher Waller who also backed the move.
Dr Waller said he was moved to support the half-point cut by unexpectedly favourable inflation data in recent weeks. He would likely support quarter-point cuts at each of the next two policy meetings.
New surprises in the data, however, could knock him off that pace.
“If labour market data worsens, or if the inflation data continues to come in softer than everybody was expecting, then you can see going at a faster pace,” he said, before adding that a fresh pickup in inflation could also cause the Fed to pause its cutting.
His views contrasted with governor Michelle Bowman, who said on Sept 23 that she voted against the decision because she remains concerned about above-target inflation. Ms Bowman became the first Fed governor to dissent against an interest rate move since 2005.
Labor market worries
Dr Goolsbee underlined his argument by cautioning that when labour markets deteriorate, they do so quicker than central bankers can deliver relief through rate cuts.
Significant layoffs have historically created a negative feedback loop in which job losses cause a pullback in spending that then drives other businesses to lay off workers in response to lower demand. “It’s just not realistic to wait until problems show up,” he said. “If we want a soft landing, we can’t be behind the curve.”
The unemployment rate, which hit a historic low of 3.4 per cent in 2023, has risen to 4.2 per cent. Dr Goolsbee said on Sept 23 that it is a level most would regard as commensurate with full employment.
“Basically, we would love to freeze both sides of the Fed’s dual mandate right here,” Dr Goolsbee said. BLOOMBERG
