Norges Bank's Bache: Don't envisage large decline in rate ahead

Norges Bank's Bache: Don't envisage large decline in rate ahead

Norges Bank's Bache, in a recent address, has expressed his skepticism about the likelihood of a significant decline in interest rates in the near future. This stance comes amidst ongoing debates within the Federal Reserve over the appropriate course of action for interest rates, given the current economic conditions and inflation rates.

Bache's remarks echo those of Kansas City Fed President Jeffrey Schmid, who has previously stated that he does not support additional rate cuts due to high inflation levels. Schmid, in a statement on October 6, highlighted the need for the Fed to protect its credibility on inflation, even as the economy remains strong and AI investment grows .

While some Fed officials, such as Stephen Miran, advocate for deeper rate cuts to address the declining job market, others, including Schmid and Lorie Logan from the Dallas Fed, have raised concerns about the potential for further rate cuts to exacerbate inflation. This division of opinion reflects the Fed's struggle to balance the need to support economic growth with the risk of fueling inflation .

Bache's position is also influenced by the current economic indicators. The job market, as indicated by a 4.3% unemployment rate, shows signs of strength, while inflation remains high, with service-related inflation stabilizing at around 3.5% . These factors suggest that a significant decline in interest rates may not be necessary at this time.

Furthermore, the economy is demonstrating resilience, with spending on AI-related software boosting business investment, and equity markets near all-time highs. These indicators support the view that the economy is strong enough to withstand a more cautious approach to interest rates.

Financial markets are currently speculating about a potential quarter-point interest rate cut at the Fed's next two meetings, scheduled for October and December. However, Bache's comments suggest that such cuts may not be as substantial as some market participants anticipate.

In conclusion, Norges Bank's Bache, along with other Fed officials, is urging caution in the face of high inflation and a strong economy. This approach reflects the Fed's commitment to maintaining its credibility on inflation while also supporting economic growth. The next few months will likely see continued debate and adjustment in the Fed's monetary policy stance.