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Not So Fast! Fed Officials Hint At Unconventional Rate Cut Trajectory Amidst Economic Uncertainties

AInvestThursday, Feb 29, 2024 2:03 am ET
2min read

On Wednesday, three Federal Reserve officials indicated on the same day that the pace of rate cuts would depend on upcoming economic data, hinting that this rate cut trajectory may differ from previous cycles.

Susan Collins, the Boston Fed President, and John Williams, the New York Fed President, stated it might be appropriate for the Fed to make its first rate cut later this year, while Raphael Bostic, the Atlanta Fed president, predicted the Fed would cut rates at some point this summer.

Meanwhile, they offered some insight into how the Fed might assess timing for future cuts.

With respect to rate cuts and pace, it"s got to be driven by economic conditions, as well as inflation. It"s not going to be calendar based, and not be on a specific fixed schedule, but focused on the data Williams said to reporters on Wednesday.

In recent times, policymakers have reiterated their desire to see more evidence of steady declines in inflation before rate cuts, especially considering that the Consumer Price Index (CPI) announced earlier this month was above expectations. The above comments further underline that economic data is the primary driver of the pace of rate cuts.

We always say we will be data dependent, Bostic stated, The data will be the guide that tells us how much or how fast or when we should actually move our policy..

In the past, the Fed typically cut rates quickly, usually in response to economic recessions. However, this time, the fundamentals of the economy appear quite different. Consumers continue to spend despite rising borrowing costs, and the unemployment rate remains stable at a historically low 3.7%. This is almost identical to the situation when the Fed started raising rates in March 2022.

Several policymakers including Bostic expect the inflation rate to continue to decline towards the central bank's 2% target, but they foresee this process to be volatile.

I still see signs that suggest that this is not going to be a fast march to 2%. As long as we are going to get there and we are not seeing bad things happen on the side I am comfortable being patient Bostic said.

The Fed's next interest rate meeting is scheduled for March 19-20, and it's expected to remain on hold. Market expectations for a first rate cut in March have been pushed back to June. Fed officials predicted in their dot plot last December that there will be three rate cuts in 2024, each by 25 basis points, an estimate that Williams says is still reasonable.

Collins said, It will likely become appropriate to begin easing policy later this year. When this happens, a methodical, forward-looking approach to reducing rates gradually should provide the necessary flexibility to manage risks, while promoting stable prices and maximum employment.

She also suggested that a further slowdown in inflation may need a further slowdown in economic activity

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