Central bank leaders pump the brakes on rate cuts amid stubborn inflation
Federal Reserve officials stressed on Friday that they are in no rush to cut interest rates despite persistent high inflation and a strong job market.
Fed representatives, including Boston’s Susan Collins and San Francisco’s Mary Daly, shared a unified message of caution against premature rate adjustments.
“There’s absolutely, in my mind, no urgency to adjust the policy rate,” Daly said at an event. “Policy is in a good place right now, and I need to be fully confident that inflation is on track to come down to 2% — which is our definition of price stability — before we would consider a rate cut.”
Echoing Daly’s cautious approach, Kansas City Fed president Jeffrey Schmid said the Fed should wait for solid evidence that inflation is decreasing towards the 2% target before considering lowering interest rates.
“With inflation running above target, economic growth continuing to show momentum, and elevated prices across a range of asset markets, the current stance of monetary policy is appropriate,” he said during a speech in Overland Park, Kansas.
Recent data shows that core consumer prices, which exclude food and energy, rose by 0.4% in March and were up 3.8% from the previous year. This has made Fed officials like Schmid advocate for patience, highlighting the need for definitive signs of declining inflation before making any policy changes.
“We’ve got to get this inflation thing right,” Schmid said. “We need to let this policy work its way through the system like it is.”
Market expectations have adjusted accordingly, with traders now leaning towards only two rate cuts this year, likely starting in September. This aligns with sentiments from other Fed officials, including Susan Collins of the Boston Fed, who sees two rate cuts as more likely than three in the current economic environment.
Schmid also advocated for a “much smaller” Fed balance sheet with a shorter average maturity, primarily composed of Treasury securities. He emphasized that the current large balance sheet is no longer necessary and exerts undue pressure on long-term interest rates.
“The balance sheet remains large and continues to put downward pressure on long-term interest rates,” said Schmid. “With inflation running above target, a tight labor market, and historically high equity valuations, the economy and financial markets no longer require support from a large central bank balance sheet.”
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