WASHINGTON, Nov 28 (Portal) – U.S. Federal Reserve policymakers appear increasingly comfortable closing out the year as U.S. interest rates are put on hold and the clock is ticking on when a first rate cut will soon come , as they try to bring about a “soft landing” for the economy.
“Inflation rates are trending broadly as I thought they would,” Fed Governor Christopher Waller, a hawkish and influential voice at the central bank, told the American Enterprise Institute think tank on Tuesday.
“I am increasingly confident that policymakers are currently well placed to slow the economy and get inflation back to 2%,” he said, and also “fairly confident” that this will happen without a sharp rise in the unemployment rate currently at 3.9%, will succeed.
If the decline in inflation continues for “several more months…three months, four months, five months…we could start cutting the key interest rate just because inflation is lower,” he said. “It has nothing to do with trying to save the economy. It is in accordance with all political rules. There’s no reason to say we’re going to keep it really high.”
Further Fed rate hikes remain possible if upcoming data includes an unexpected resurgence in price pressures, he said. And an unforeseen shock could “ruin” the soft landing scenario, he said.
But overall, it was a change in tone that seemed to begin the countdown to a long-awaited turning point.
“The response function to lower interest rates in response to lower inflation is not surprising,” wrote Karim Basta of III Capital Management. “Setting a clear time frame is important.”
Bond yields fell after the comments, and traders began cutting prices in May, falling by more than a full percentage point in 2024.
The Fed kept its federal funds rate stable in the range of 5.25% to 5.50% at the end of its meeting from October 31 to November 31. 1 political meeting, and analysts overwhelmingly expect the same outcome at the December 12-13 meeting.
Waller’s comments included the caveats now standard in public appearances by Fed officials.
“Inflation is still too high and it is too early to say whether the slowdown we are seeing will be sustained,” he said. “There is still significant uncertainty about the pace of future activity, and therefore I cannot say with certainty whether the (Federal Open Market Committee) has done enough to achieve price stability.”
This week marks the last opportunity for Fed policymakers to publicly express their views before the usual pre-meeting communications blackout goes into effect.
Fed Chairman Jerome Powell will likely have the final word with remarks Friday at Spelman College in Atlanta.
Do not overcook the turkey
Using the Fed’s preferred measure, the consumer spending price index, inflation has fallen from a high of 7.1% last summer to a current level of 3.4%.
The Fed is targeting an inflation rate of 2%, and policymakers attribute the progress so far to a combination of improvements in goods and labor supplies after pandemic-era distortions, as well as the restrictive effect of sharply increased borrowing costs after the Fed pushed interest rates higher by 5.25 percentage points within 18 months.
Chicago Fed President Austan Goolsbee is certainly worried about overdoing it.
“Once you believe you are on track to bring inflation to the target level, you need to take less restrictive measures,” he said in an interview with Marketplace on Tuesday. “Anyone who cooks a turkey knows that you have to take it out of the oven before it reaches the desired point because it will have residual heat.”
At a meeting of the Utah Bankers Association in Salt Lake City, Fed Governor Michelle Bowman sought to keep alive the possibility of another rate hike, raising a number of questions about the durability of progress on inflation.
“My fundamental economic outlook continues to be that we need to continue raising the federal funds rate to keep monetary policy sufficiently tight and to reduce inflation to our 2% target in a timely manner,” Bowman said.
But even Bowman stopped short of directly calling for a further increase in the key interest rate. She, like Waller and Goolsbee, said further Fed action would depend on economic data.
New inflation data will be released on Thursday, and policymakers will also have a new monthly jobs report and other data before it is compiled next month.
Waller pointed to healthy recent data that’s already trending in the Fed’s direction: Consumer prices were flat in October, retail spending fell and wage growth was starting to slow.
The labor market remains “quite tight” and needs to be monitored, he said, while a recent decline in long-term market interest rates has eased some of the credit tightening that the Fed is relying on to slow the economy.
But long-term interest rates “are still higher than they were before mid-year, and overall financial conditions are tighter, which should put downward pressure on household and business spending,” Waller said.
Reporting by Howard Schneider, Ann Saphir and Lindsay Dunsmuir; Edited by Andrea Ricci, Paul Simao and Chris Reese
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