Federal Reserve Warns Against Premature and Excessive Cuts in US Interest Rates


On Thursday, a number of Federal Reserve policymakers cautioned against prematurely reducing U.S. interest rates or making significant cuts, citing the latest data indicating higher-than-anticipated inflation in January.

Their remarks mirrored the minutes from the Federal Reserve’s previous meeting in January, which were made public on Wednesday. The minutes indicated that the majority of central bank officials were worried about the possibility of inflation increasing if rates were cut too quickly, especially after a significant decline in the past year. Only a few policymakers expressed concerns about a different risk: that maintaining high rates for an extended period could hinder economic growth and possibly lead to a recession.

Christopher Waller, a member of the Fed’s influential board of governors, titled a written copy of remarks he delivered Thursday, “What’s the rush?”

“We must confirm that the progress on inflation observed in the latter half of 2023 will be sustained, indicating that there is no need to hastily reduce interest rates,” Waller stated.

The inflation rate has dropped from a high of 7.1% in 2022, based on the Fed’s preferred measure, to only 2.6% for the entire year of 2023. During the latter part of the previous year, prices increased by only 2% annually, aligning with the Federal Reserve’s goal.

However, prices for consumers, excluding food and energy, increased significantly from December to January, marking the largest rise in eight months. Compared to the previous year, there was a 3.9% increase, which matched the previous month’s figures.

Waller mentioned that the numbers for January could have been influenced by unique factors, such as companies increasing prices at the beginning of the year, or they could indicate that inflation is more persistent than previously believed.

“We simply don’t have the information at this time,” he added. “This implies a need for more time before I am sufficiently assured that reducing rates will lead us to achieving 2% inflation.”

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Federal Reserve Signals Potential Rate Cuts Amid Inflation Concerns and Economic Growth

Several economists anticipated that the Fed might make its initial cut in May or June, but Waller’s remarks could alter those forecasts. In December, Federal Reserve officials predicted they would reduce their benchmark rate by a quarter-point three times in the coming year. Following a swift succession of rises in 2022 and 2023, the current rate stands at approximately 5.4%, marking a 22-year peak.

Reductions in the Fed’s rate generally lead to lower borrowing costs for mortgages, car loans, credit cards, and various types of business financing.

Waller expressed confidence in the decreasing inflation trend and anticipates that the Fed will lower the rate this year. He pointed out that there is a higher likelihood of inflation staying persistently above the Fed’s 2% target rather than dropping below it.

With the job market robust and the economy expanding steadily — growth reached 3.3% on an annual basis in the last quarter of last year — Waller mentioned that the Fed can afford to be deliberate in determining when to reduce.

On a different note, Patrick Harker, the president of the Federal Reserve Bank of Philadelphia, also shared concerns about reducing rates prematurely.

“I think we might see a decrease in the rate this year,” he stated. “I would advise against searching for it immediately.”

Fed Vice Chair Philip Jefferson cautioned against reducing rates too much in light of the favorable economic developments. Jefferson collaborates closely with Chair Jerome Powell in steering the Fed’s policy as vice chair.

Jefferson emphasized the importance of being cautious about reducing measures in light of positive changes in inflation. When the Fed reduces its short-term interest rate, it is known as easing. “Too much easing may result in a halt or reversal of progress in reestablishing price stability.”

However, a few Federal Reserve officials have minimized the surprisingly high inflation numbers in January.

Last week, Mary Daly, the president of the San Francisco Fed, expressed confidence in the direction despite January’s inflation data.


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