Fed Policymakers Signal Caution on Future Rate Cuts
After this week’s interest rate cut, Federal Reserve policymakers are hinting at a pause in further reductions in borrowing costs next year. They want to assess the progress made in lowering inflation before making their next move.
A Close Call on Rate Cuts
San Francisco Fed President Mary Daly and Cleveland Fed President Beth Hammack both described the decision to cut interest rates as a “close call.” While Daly supported the rate cut, Hammack dissented, arguing that the economy’s strength warrants holding the policy rate steady.
No Rush to Cut Rates Further
Despite expectations of two quarter-percentage-point rate cuts in 2025, neither Daly nor New York Fed President John Williams suggested any urgency to act quickly. They emphasized the need to be data-dependent and take their time to assess the incoming information.
Recalibrating Monetary Policy
The Fed cut rates by 100 basis points in 2024, shifting its monetary policy to a less restrictive stance as inflation fell and the labor market cooled. Daly believes this recalibration phase is now behind them, and the focus has shifted to analyzing incoming data.
Assessing the Data
Williams echoed Daly’s sentiments, stating that the Fed is well-positioned to tackle what lies ahead. He emphasized the importance of being data-dependent and taking the time to assess the data, outlook, and risks to achieve their goals.
Inflation Data Supports Cautious Approach
The latest inflation data from the U.S. Commerce Department supports the Fed’s cautious approach. The Personal Consumption Expenditures Price Index, excluding volatile food and energy items, rose 2.8%, in line with Fed Chair Jerome Powell’s expectations.
Market Reaction
The data has prompted financial markets to firm up bets on a Fed rate cut in March, with one more rate reduction seen as probable by October. This marks a shift from earlier expectations of only even odds for a second rate cut by the end of 2025.
Dissenting Views
Hammack’s dissenting statement highlighted her concerns that the economy’s strength argues against another rate cut at this time. She wants to hold the policy rate steady until there is more evidence that inflation is resuming its path toward the Fed’s 2% goal.
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