Cautious Approach to Rate Cuts Amid Economic Uncertainty
As the new year begins, Federal Reserve Bank of Boston President Susan Collins is advocating for a gradual and patient approach to policymaking, citing significant uncertainty over the economic outlook. With the economy in a good place overall and policy already closer to a more neutral stance, Collins believes it’s essential to move forward cautiously with future rate cuts.
Inflation on a Gradual Decline
Inflation has decreased significantly from its 2022 peak, and data suggests a gradual, if uneven, trajectory back to the Fed’s 2% target. This achievement is notable, considering the job market has remained healthy overall and has rebalanced from overly hot conditions.
A Close Call: Last Month’s Rate Cut
Collins supported last month’s quarter-percentage-point rate cut, describing it as a “close call” that provided additional insurance to preserve healthy labor market conditions while maintaining a restrictive policy stance necessary to sustainably restore price stability.
Uncertainty Surrounds Future Rate Cuts
Financial markets are debating whether the Fed will deliver another rate cut at the end of this month. The outlook is further complicated by the return of Donald Trump to the presidency, whose campaign promises of massive trade tariffs and deportations may pressure inflation higher and make it harder for the Fed to achieve its 2% target.
No Firm Views on Monetary Policy
Collins refrained from offering firm views on where she expects monetary policy to go, but stated that her views on rate policy and the economy align with the forecasts released by the Fed last month. She emphasized that Fed policy is not on a preset path and is currently well-positioned for what may come.
Stickier Inflation Ahead
Collins now sees stickier levels of inflation going forward, relative to her recent views. As the economy navigates uncertain waters, the Fed must remain vigilant and adaptable to ensure sustainable economic growth and price stability.
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