Federal Reserve officials on Friday (15.12.2023) offered competing views on when they might start cutting interest rates next year after Chairman Jerome Powell suggested they were likely done raising them.
At the moment there is no talk of a reduction in rates
One of Powell's senior trustees said on Friday that central bank officials did not actively discuss when to cut rates at their meeting last week, an apparent effort to soften the interpretation of the chairman's comments at Wednesday's (13.12.2023) press conference.
"We're not talking about lowering rates right now," New York Fed President John Williams said on CNBC on Friday.
Another official, Chicago Fed President Austan Goolsbee, said the recent drop in inflation means policymakers may have to prepare to cut rates sooner than anticipated.
Three rate cuts in next year
Stocks rose and bond yields fell Wednesday after the Fed held interest rates steady and officials predicted three rate cuts next year. While Powell said on Wednesday that it was too soon to say the Fed was done raising rates, he sparked the rally when he also volunteered that officials were preparing for when to cut rates.
"The question of when it will be appropriate to start reducing the amount of policy constraints is starting to come into focus and is clearly a topic of discussion around the world and also a discussion for us at our meeting today," Powell said at Wednesday's meeting.
Goldman Sachs expects up to five rate cuts in 2024
Wall Street economists have also shifted their rate cut forecasts. On Thursday, Goldman Sachs said it expects the Fed to cut rates five times next year starting in March. Previously, it had counted on three or four cuts starting in July at the earliest.
Powell and his colleagues have shifted their stance in recent months because of the marked improvement in inflation, even for so-called core prices, which exclude volatile food and energy items.
Inflation below 2%
The data suggest that core inflation will reach or even fall below 2% on a six-month annualized basis.
"The inflation numbers are basically performing better than expected on a fairly stable basis, and people are confident that we're getting back on target as promised," Goolsbee said in an interview Friday on the WSJ's Take On The Week podcast.
Goolsbee said that if the recent decline in inflation reverses, then the Fed should be prepared to raise interest rates. "But if we see inflation falling more than we expected, we should be prepared to recognize whether the current level of interest rates is too tight," he said.
The Fed has a dual mandate
For most of the past two years, officials have focused almost exclusively on bringing inflation down to the levels that prevailed before the pandemic, even if that has meant an increase in unemployment. The Fed has a dual mandate to ensure that prices are low and stable and that the economy has low unemployment.
"We'll come back soon to the fact that employment as one of the mandates is just as important," Goolsbee said. He added that since interest rates are at levels that should curb economic activity.
Updated economic forecasts
Powell said on Wednesday that officials had discussed cutting rates in the context of presenting updated economic forecasts. Eleven of the 19 officials projected the Fed would cut rates at least three times next year, and another five thought the Fed would cut rates twice.
In September, most officials thought the Fed would raise rates one more time this year and then cut rates twice next year.
Premature declaration of victory over inflation
Some former Fed officials have warned that declaring victory over inflation prematurely could make it harder for the central bank to sustain the slower economic growth needed to fully curb inflationary pressures. Easier financial conditions in the form of lower borrowing costs and higher prices for stocks, bonds and other assets could boost growth.