Federal Reserve officials lean into cautious stance as policymakers wait for further signs of easing


  • Federal Reserve officials await more "good inflation" data before cutting rates.
  • Jerome Powell reiterates data-dependent approach, says they will make decisions meeting by meeting.
  • Federal Reserve policymakers are divided over the timing of the policy pivot.

Federal Reserve (Fed) left the policy rate unchanged at 5.25%-5.5% following the June policy meeting, as expected. The revised Summary of Economic Projections (SEP), the so-called dot plot, showed that policymakers were divided over the near-term rate outlook. Four of 19 officials saw no rate cuts in 2024, seven projected a 25 basis points (bps) rate reduction, while eight marked down a 50 bps cut in the policy rate.

Fed policymakers speak on inflation and rate outlook

Fed Chairman Jerome Powell refrained from hinting at the timing of the rate reduction in the post-meeting press conference. "We need further confidence, more good inflation readings but won't be specific about how many to start rate cuts," Powell explained.

Following the Fed event and May inflation data, the probability of the Fed leaving the policy rate unchanged in September declined toward 30% from 50%, according to the CME FedWatch Tool. 

With the Fed's blackout period coming to an end after the June meeting, investors will pay close attention to comments from policymakers in the near term. 

Cleveland Fed President Loretta Mester said that she would like to see a "longer run of good-looking inflation data," and Minneapolis Fed President Neel Kashkari stated over the weekend that it would be a “reasonable prediction” that the Fed will wait until December to cut interest rates, adding that the central bank is in a very good position to get more data before making any decisions. Meanwhile, President of the Philadelphia Fed, Patrick Harker, leaned into a cautious stance on Monday, noting that the Fed may need to keep rates where they are for longer than markets currently hope.

On Tuesday, New York Fed President John Williams adopted a neutral voice, telling Fox Business that he expects interest rates to come down gradually as inflation eases. 

Boston Fed President Susan Collins followed closely on Fed Williams' heels, noting that despite significant progress on inflation, price growth remains stubbornly above the Fed's 2% inflation target. Fed Collins reiterated the need to avoid overreacting to recent inflation data, stating that it is still too soon to say whether or not inflation is truly on its way back to 2%.

Fed Board of Governors member Adriana Kugler followed up on Tuesday, noting that inflation progress remains gradual, but highlighted that the US central bank expects only a slight softening of the US labor market as interest rates take small chunks out of inflation.

Newest Fed member, Alberto Musalem, the fresh President of the St. Louis Fed, joined the chorus of cautious Fed officials on Tuesday, highlighting his willingness to tighten policy further if inflation figures were to become stuck above the Fed's 2% target. St. Louis Fed President Musalem also cautioned that it could take months or even entire quarters before Fed policy finishes up the battle with above-target inflation.

Following her colleagues' line, President of the Dallas Federal Reserve Bank Lorie Logan remarked on Tuesday that the recent data indicating a slowdown in inflation is "encouraging," but emphasized that the Fed must remain cautious and patient regarding interest-rate policy.

Federal Reserve Bank of Chicago President Austan Goolsbee rounded out Tuesday's Fed official appearances, noting that the lastest update on Consumer Price Index (CPI) inflation was "excellent", and reiterated that he hopes to see more of the same in future inflation prints.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

 

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