Throwing cold water on recent interest rate cuts again! The Fed’s second-in-command and governor als

Two senior Federal Reserve officials stressed on Thursday that the central bank will still cut interest rates this year, but not anytime soon.

Fed Governor Lisa Cook and Vice Chairman Philip Jefferson said they were optimistic that inflation was still cooling despite a brief blip in January, but they made clear they wanted more data before cutting rates. There is plenty of evidence that inflation will return to the 2% target level. Their comments echo those of several Fed officials who have suggested in recent weeks that they are in no rush to begin easing policy, although a rate cut may be the next policy move.

In a speech at the Princeton University Macro Finance Conference on Thursday, Cook said she would like to see more progress on inflation before starting to cut interest rates.

“Before we start lowering policy rates, I would like to have greater confidence that inflation is approaching 2%. To the extent that we become more confident that disinflation is ongoing and sustainable, the change in outlook will allow policy Interest rates have changed," Cook said. "I think the eventual rate cut is about adjusting policy to reflect the changing balance of risks."

Cook said risks to the Fed's dual goals of price stability and maximum employment are now in a better balance, rather than being more skewed toward inflation as they have been in past years. She also noted that the road to achieving the 2% inflation target is likely to continue to be bumpy.

"The expectation that personal consumption expenditures (PCE) will gradually approach our 2% target over the next 12 months remains a reasonable base outlook," Cook said. PCE is the Fed's preferred indicator. "As we receive more data, we should continue to err on the side of caution and maintain the level of policy restraint necessary to sustainably restore price stability while keeping the economy on a sound track," she said.

Speaking at the Peterson Institute for International Economics on Thursday, Jefferson said it might be appropriate to start cutting interest rates later this year. But he said officials need to be wary of cutting interest rates too much to ease price pressures. "Excessive easing could stall or reverse the process of restoring price stability."

Philadelphia Fed President Patrick Harker also said at a separate event on Thursday that cutting interest rates too early could undo progress on inflation and that he wants to see more evidence that price pressures are generally easing. Harker will not have a vote on policy decisions this year. "I believe we may see interest rates come down this year, but I would caution everyone not to do that right away," he said.

However, Harker said he would not rule out a rate cut in May, adding, "Just give us a few meetings."

Notably, Jefferson warned that the job market could deteriorate rapidly and that the Fed must remain vigilant. Cook warned that slowing demand could prompt companies to start laying off more workers and "lead to a more significant rise in unemployment than we have seen so far." Both Jefferson and Cook said they were surprised by how strong consumer demand was last year, but they expected it to slow in 2024 as high interest rates continue to weigh on households.

"Savings accumulated during the COVID-19 pandemic are declining, especially for people with low or moderate incomes," Cook said. Some credit usage indicators, such as credit card and buy now pay later usage, and the number of people holding credit card balances. The proportion of households is already higher than before the epidemic."

Jefferson said he sees three major risks to the economic outlook. Consumer spending could prove more resilient than he expected, hampering inflation's progress. Oil and other commodity markets could be affected by expanding conflicts in the Middle East. As economic growth slows, employment is likely to weaken. “The labor market is likely to change dramatically,” he said during a question-and-answer session after his speech. "We have to be careful and we have to try to assess the different shocks that could hit the economy and adjust policy accordingly."

Article forwarded from: Golden Ten Data