Fed Leaders Oppose Recent Cut, Citing Inflation Concerns

Recent statements from U.S. Federal Reserve officials reveal significant opposition to cutting interest rates. The discussions emphasize concerns about inflation as the Federal Reserve approaches its next policy meeting in December.

Federal Officials Express Dissent on Rate Cuts

This week, three central bank leaders made clear their reservations about a rate cut. Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack stated they would have preferred to maintain the current rates. Their comments came during a conference in Dallas following Kansas City Fed President Jeff Schmid’s public dissent against the recent reduction.

Key Statements from Fed Officials

• Lorie Logan: Expressed reluctance to support another rate cut in December unless inflation shows clear signs of decline.
• Jeff Schmid: Voiced his concerns about inflation, indicating the labor market is largely balanced and ongoing inflation remains too high.
• Beth Hammack: Supported maintaining some restrictions to help achieve inflation targets.

Logan stated, “I’d find it difficult to cut rates again in December unless there is clear evidence that inflation will fall faster than expected.” Schmid’s statement highlighted that both economic momentum and inflation pressures are ongoing challenges.

Impact of Recent Rate Changes

The Federal Reserve recently decreased its benchmark interest rate by a quarter percentage point for the second consecutive month. This change is partly a response to a slowdown in hiring during the summer, raising concerns about the labor market. Fed Chair Jerome Powell indicated that further cuts are not guaranteed and suggested a “growing chorus” among officials who believe a pause may be more prudent.

Despite these discussions, markets remain optimistic about a potential rate cut in December. However, opinions vary among Fed officials regarding the necessity of easing monetary policy further. Fed Governor Christopher Waller is among those advocating for a cut, emphasizing the labor market as a central concern.

The Neutral Rate Debate

A critical aspect of the ongoing discussion is the concept of the “neutral rate.” This theoretical rate neither stimulates nor restricts economic growth. Current estimates place the neutral rate between slightly above 2.5% and just below 4%. The latest rate cut adjusted the target range to 3.75% – 4%, raising questions about appropriate monetary policy moving forward.

• Logan’s Perspective: Believes the Fed’s benchmark is near her estimate of the neutral rate.
• Bostic’s View: Suggested that monetary policy might still be in restrictive territory despite the recent cuts.

Powell remarked on the need for careful consideration, indicating that the Fed is closer to neutral than it was a year ago, which may warrant a pause in cuts.

Future Actions and Balance Sheet Management

In addition to interest rate discussions, the Fed announced plans to conclude its balance sheet reduction efforts on December 1. Logan supports this decision, suggesting it could alleviate funding pressures in the market. The Fed will continue to unwind its portfolio of mortgage-backed securities while investing proceeds into Treasury bills.

Logan added that if recent increases in short-term interest rates persist, the Fed may need to begin purchasing assets again to maintain adequate reserves.

As the December meeting approaches, it is clear that ongoing debates about inflation and monetary policy direction will intensify among Federal Reserve officials.