Yahoo Finance Fed officials are warning the Fed may not cut rates as soon as investors think
Wall Street is predicting interest rate cuts by next May, with the possibility they happen as soon as March. But that doesn't align with public statements from most Federal Reserve officials in recent weeks.
While many officials are feeling more comfortable that interest rates are likely at the right level to bring down inflation, most are still keeping the option of another rate hike on the table and suggesting rates will remain elevated for some time. One has even said more hikes are still expected.
Fed Chair Jerome Powell tried to set the markets straight Friday, saying "it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so."
Others echoed Powell earlier in the week. New York Fed President John Williams brushed off questions Thursday about when the Fed might cut rates, calling it a hypothetical concern that's "well off into the future."
San Francisco Fed President Mary Daly said in an interview published by a German newspaper that she's "not thinking about rate cuts at all right now."
Philadelphia Fed President Patrick Harker predicted that "a decrease in the policy rate is not something that is likely to happen in the short term."
Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards
The warnings from Fed officials about rates remaining elevated haven't stopped investors from betting the Fed will soon cut rates during the early half of 2024.
Billionaire Bill Ackman made waves this week when he predicted the cuts could come as soon as the first quarter.
And then on Friday, the odds for a rate cut in March moved higher to 55% even after Powell warned it was too early to think about rate cuts.
Investors looking for reasons to bet on cuts were encouraged by new data this week showing that inflation had slowed once again.
The Fed’s favored inflation measure — the core Personal Consumption Expenditures index — clocked in at 3.5% for the month of October, down from 3.7% in September, continuing a downward trend from 4.3% back in June. Inflation measured by core PCE is now below where the Fed expected it to end this year.
Investors also focused on comments from one Fed official — Fed Governor Chris Waller — to bolster their bets. Waller suggested that falling inflation will eventually warrant rate cuts even if the real economy is not weakening.
Pointing to policy rules that state if inflation comes down low enough rates don’t need to be kept at high levels, Waller said "if we feel confident that inflation is really down and on its way that you could then start lowering the policy rate just because inflation is lower."
One reason why most of Waller's colleagues are using cautious commentary in public is a fear that if they declare victory too early, such language could contribute to a loosening of financial conditions, That, in turn, could make it more difficult for the Fed to achieve its goal of getting inflation down to 2%.
The Fed last hiked rates in July and has elected to keep interest rates unchanged the past two policy meetings in a range of 5.25%-5.50%, a 22-year high. It meets for the last time this year on Dec. 12-13, when it's expected to hold rates steady for the third meeting in a row.
The Fed debate
The biggest disagreement among Fed officials at the moment is whether rates should still go higher.
Fed Governor Michelle Bowman, Minneapolis Fed President Neel Kashkari, and Boston Fed President Susan Collins have said they think more rate hikes could yet be needed.
“My baseline economic outlook continues to expect that we will need to increase the federal funds rate further to keep policy sufficiently restrictive to bring inflation down to our 2% target in a timely way,” Governor Bowman said last Tuesday in a speech in Utah.
A larger group, including Powell, has made it clear they are open to both options: holding rates steady or raising them higher if needed. They argue there is more work to do to get rates down to 2%.
That camp includes Vice Chair Philip Jefferson and Fed Governors Lisa Cook and Michael Barr, as well as Williams and Chicago Fed President Austan Goolsbee.
“While the lower inflation readings of the past few months are welcome, that progress must continue if we are to reach our 2% objective," Powell said Friday.
There are some Fed officials that have offered stronger hints that they believe the Fed is possibly done raising rates. One is Waller, although he wants to see more data over the next couple of months to be sure.
“I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%,” Waller said this week in a speech in Washington.
Philadelphia Federal Reserve President Patrick Harker and Atlanta Fed President Raphael Bostic have been even more forceful in suggesting they are satisfied with the Fed’s policy stance and are content to hold rates steady at current levels for some time.
Bostic said this week he has more confidence that inflation will continue to drop over the next year, implying the Fed could be done raising interest rates if his prediction holds.
"I’m sensing greater clarity about a few important currents. One is the direction of inflation. There’s no question the rate of inflation has slowed materially over the past year-plus," Bostic wrote in an essay.
Research done by the Atlanta Fed and input from business leaders "tell me the downward trajectory of inflation will likely continue."
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