Fed Prioritizes Inflation Control Over Rate Cuts Despite Economic Resilience

Federal Reserve Bank of Boston President Susan Collins remains skeptical about implementing a rate cut at the central bank's December meeting, citing ongoing inflation concerns and a resilient economy. In a recent CNBC interview, Collins emphasized that "restrictive policy is very appropriate right now" given current inflation levels and expressed caution about lowering borrowing costs further according to Collins. Her remarks align with broader Federal Open Market Committee (FOMC) hesitancy, as recent meeting minutes revealed a lack of majority support for a December easing.

The Fed's October rate cut, its second in a row, aimed to cushion a softening labor market while maintaining downward pressure on inflation, which has exceeded the 2% target for nearly four and a half years according to reports. However, policymakers remain divided. The October meeting minutes highlighted concerns that progress on inflation had "stalled" and that rate cuts could risk undermining the central bank's credibility in curbing price pressures according to the minutes. Stephen Miran, a Fed governor, dissented in favor of a larger cut, while Kansas City Fed President Jeff Schmid opposed any reduction, marking the first two-sided dissent since 2019 as minutes suggest.

Complicating the Fed's decision-making is the government shutdown, which delayed the release of the November employment report until December 16-just days before the December meeting according to market analysis. This lack of critical data has heightened uncertainty, with officials expressing difficulty in assessing economic conditions. Collins noted in her interview that mixed September hiring data and a resilient broader economy left her "hesitant" about the need for further action according to her remarks.

Meanwhile, the Fed's broader policy environment is evolving. The central bank recently halted its quantitative tightening program, which had aimed to reduce its $6.6 trillion balance sheet by allowing maturing pandemic-era bonds to remain unreplenished.

Market reactions to the uncertainty have been mixed. Jefferies analysts estimate that U.S. bank deregulation could unlock $2.6 trillion in capital for large institutions, potentially boosting lending and profitability according to Jefferies. However, investors remain cautious. Compass Diversified shares surged 13.3% after New York Fed President John Williams hinted at potential rate cuts "in the near term," but the broader market remains wary of inflation risks according to market analysis.

Looking ahead, the Fed's December 9-10 meeting will be closely watched. While some officials, like Williams, have signaled openness to easing, the prevailing view among policymakers appears to favor maintaining current rates until inflation shows clearer signs of moderation according to the minutes. Collins' stance-rooted in the belief that the economy remains strong enough to withstand rate cuts-reflects a broader faction within the Fed that prioritizes price stability over aggressive stimulus according to her interview.