With the Fed likely to raise interest rates, the Waller flags are moving forward

WASHINGTON (Reuters) – Policymakers at the Federal Reserve (the US central bank) appear to be increasingly comfortable closing out the year with US interest rates on hold and the clock ticking on when to implement the first interest rate cut as they try to engineer a “soft landing” for the economy. .

“Inflation rates are moving pretty much as I thought they would,” Fed Governor Christopher Waller, an influential hawkish voice on the central bank, told the American Enterprise Research Institute on Tuesday.

“I am increasingly confident that policy is currently well placed to slow the economy and bring inflation back to 2%,” he added, and he is also “reasonably confident” of doing so without a sharp rise in the unemployment rate, which now stands at 3.9%.

He said that if inflation continues to fall “for a few more months… three months, four months, five months… we can start cutting the interest rate just because inflation is lower.” “It has nothing to do with trying to save the economy. It’s in line with every political rule. There’s no reason to say we’re going to keep it really high,” he added.

He said additional interest rate increases by the Fed remain a possibility if upcoming data includes an unexpected return of price pressures. He added that an unexpected shock could “blow up” the soft landing scenario.

But overall, there has been a shift in tone that seems to have begun the countdown on a long-overdue pivot.

“The reaction to lower interest rates in response to lower inflation is not surprising,” wrote Karim Basta of III Capital Management. “Establish a clear time frame for this.”

Bond yields fell after these statements, and traders turned to interest rate cuts starting in May, with a decline of more than a full percentage point in 2024.

The Fed kept its benchmark overnight interest rate steady in a range of 5.25%-5.50% at the end of its October 31-November meeting. Analysts overwhelmingly expect the same result to be reached at the meeting, which will be held on December 12-13.

Waller’s comments included the caveats that are now standard in public appearances by Fed officials.

He added: “Inflation is still very high, and it is too early to say whether the slowdown we are witnessing will continue.” “There remains a great deal of uncertainty about the pace of future activity, so I cannot say with certainty whether the (Federal Open Market Committee) has done enough to stabilize prices.”

This week marks the last chance for Fed policymakers to express their views publicly before the usual pre-meeting communications blackout goes into effect.

Federal Reserve Chairman Jerome Powell will likely have the final say with his remarks Friday at Spelman College in Atlanta.

Do not overcook the turkey

According to the Fed’s preferred measure, the Personal Consumption Expenditures Price Index, inflation fell from 7.1% last summer to a recent reading of 3.4%.

The Fed is targeting a 2% inflation rate, and policymakers attribute progress so far to a combination of improvements in the supply of goods and labor after pandemic-era distortions, as well as the restrictive impact of sharply higher borrowing costs after the Fed led… Federal policies. The interest rate rose by 5.25 percentage points over 18 months.

For Chicago Fed President Austan Goolsbee, there are certainly some concerns about overdoing it.

“Once you think you’re on track to reach your inflation target, the amount of restriction you need to apply should be less,” he said in an interview Tuesday with Marketplace. “Anyone who cooks a turkey knows that you should take it out of the oven before it gets to the point you want, because it will have residual heat.”

Speaking at a meeting of the Utah Bankers Association in Salt Lake City, Federal Reserve Governor Michelle Bowman sought to keep the possibility of a rate hike alive, raising a series of questions about how sustainable progress in inflation is.

“My baseline economic outlook still expects that we will need to increase the federal funds rate to keep policy restrained enough to bring inflation down to our 2% target in time,” Bowman said.

But even Bowman stopped short of explicitly calling for another interest rate increase. She, like Waller and Goolsbee, said further action by the Fed would depend on economic data.

New inflation data will be published on Thursday, and policymakers will also have a new monthly jobs report and other data on hand before collecting it next month.

Waller pointed to recent health data that has already moved in the Fed’s direction, with consumer prices flat in October, retail spending weakening, and a slow deceleration in wage growth.

The labor market remains “fairly tight” and worth monitoring, he said, while the recent decline in long-term market interest rates has eased some of the credit tightening the Fed is relying on to slow the economy.

Long-term interest rates “remain 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.

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