Fed is closer to cut interest rates
The Federal Reserve is moving closer to reducing interest rates. If the recent inflation slowdown persists, a senior Federal Reserve official has indicated that an interest-rate cut may be necessary in the near future. However, this adjustment is not expected to take place at the central bank’s upcoming meeting in two weeks.
In an interview on Tuesday, New York Fed President John Williams noted that recent inflation data, combined with indications of a gradual cooling in U.S. labor-market conditions, are bringing us closer to the disinflationary trend we have been anticipating. These are encouraging indicators. I would appreciate the availability of additional data to enhance my confidence in the sustainability of inflation moving towards our 2% goal.
Based on Williams’ remarks, it seems that a rate cut is not probable during the upcoming Fed meeting, even if there are a few officials advocating for it. Williams, as the vice chair of the Fed’s rate-setting committee and a key policy adviser to Chair Jerome Powell, provides valuable insights into the matter.
On the contrary, his comments suggest that the central bank may contemplate reducing its benchmark short-term interest rate during the next meeting in mid-September, as long as there are no significant economic shocks.
According to Williams, the latest data on the consumer-price index for June indicate a significant decrease in inflation across various sectors. He argued against the notion that achieving the Fed’s 2% inflation target would be more challenging than the previous task of reducing inflation from 7% to the current level of approximately 2.5%.
“It’s not exactly a tale about a ‘last mile’ or any specific component that’s particularly challenging,” remarked Williams. Inflation measures are showing positive trends and maintaining consistency.
In response to soaring inflation, the central bank swiftly raised interest rates from their historically low levels in 2022. Officials last increased their benchmark federal-funds rate in July 2023 to approximately 5.3%, marking the highest level in over twenty years.
According to Williams, the Federal Reserve’s decision to lower rates, if and when it happens, will still have a restraining effect on economic activity.
“The current policy stance we have in place is appropriate,” stated Williams. There is a decision looming ahead of us to consider adjusting interest rates in a manner that reduces the restrictiveness of current policy, rather than completely abandoning it.
The fed-funds rate has a significant impact on various borrowing costs in the economy, including mortgages, credit cards, and business loans. Last week’s inflation report has increased the likelihood of rate cuts, which is good news for potential borrowers. Bond investors are already responding to this news, providing some relief. As per the latest data from Mortgage News Daily, the average 30-year mortgage rate has dropped to approximately 6.84% this week, marking a decrease from 7.14% earlier this month.
In the second half of 2023, officials were taken aback by the unexpectedly rapid deceleration of price growth, despite robust spending and hiring. They focused on the timing of rate cuts, and by March, there was speculation that the Fed might implement them by June.
However, prices experienced a significant increase in the first quarter, which led to the delay of any potential cuts. In the past three months, there has been a noticeable deceleration in price growth and a slight increase in the unemployment rate. This has alleviated worries about the emergence of new inflationary pressures. Some officials have cautioned that unemployment may increase more rapidly as the labor market loses momentum.
Officials are attempting to strike a delicate balance between the potential consequences of acting too cautiously, which could lead to a more severe decline in hiring, and the potential consequences of acting too hastily, which could result in inflation surpassing the Fed’s target.
According to Williams, the labor market is not weak, but it is important to bring supply and demand into better balance. He believes that once this balance is achieved, it should be maintained rather than continuing indefinitely.
Although investors are expecting a rate cut in September, the June CPI report’s indication of a general slowdown in inflation has led some private-sector economists to speculate whether the Fed might start lowering rates at its upcoming meeting in two weeks. “Why wait?” exclaimed Jan Hatzius, the chief economist at Goldman Sachs, in the headline of a research note distributed on Monday.
“We will gain valuable insights during the period from July to September,” stated Williams. If the labor market were to unexpectedly weaken or if there is confidence that inflation is returning to 2%, Fed officials have indicated they would initiate interest rate cuts.
We have experienced a few months of positive data. This is the type of data that I hope to see more of in the upcoming months…”If we achieve that… I would feel more confident that inflation is steadily reaching 2%,” stated Williams.
