Fed Officials Are Walking a Tight Line on Rate Cut Timing

Federal Reserve Chair Jerome Powell said he still sees interest rate cuts this year, but not anytime soon.

His comments on Wednesday were similar to what his fellow central bank policymakers have been saying in speeches this week. Despite a recent rise in inflation and other economic indicators, rate cuts are still on the table for this year, even if it isn’t clear when.

Federal Reserve Gov. Adriana Kugler said Wednesday that her baseline expectation is for inflation to continue to diminish without a broad economic slowdown, opening the door for rate cuts to start this year.

But other central bank officials are less certain. Atlanta Fed President Raphael Bostic said that the Fed should cut its benchmark interest rate only once this year, and closer to the end of 2024.

The range of options reflected in policymakers’ speeches show that Fed officials want to remain flexible and open to what future data show. The March jobs report comes out on Friday, and the March consumer price index will be released next Wednesday.

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Powell told the Stanford Business, Government, and Society Forum in California that the recent hot inflation and economic data “do not materially change the overall picture, which continues to be one of solid growth, a strong but rebalancing labor market, and inflation moving down toward 2% on a sometimes bumpy path.”

The Fed’s preferred measure of inflation, the core personal consumption expenditures price index, was up 2.8% in February from one year ago, and 2.9% higher in January from a year earlier. First-quarter job growth has remained strong, reflecting a resilient U.S. economy. The Atlanta Fed’s GDPNow model estimates a 2.8% annualized growth rate for real gross domestic product in the first quarter.

The Fed is still nearing a pivot toward cutting rates this year, Powell said, but the timing remains uncertain and depends on what the data say. He said there are risks to the economy if policymakers cut rates too fast or too slow.

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“Reducing rates too soon or too much could result in a reversal of the progress we have seen on inflation and ultimately require even tighter policy to get inflation back to 2%,” Powell said. “But easing policy too late or too little could unduly weaken economic activity and employment.”

The Federal Open Market Committee has held its benchmark rate at 5.25% to 5.5% since July 2023, a level that Powell called “tight.” Prices for interest-rate futures and Fed officials’ latest collective forecast both imply three quarter-point rate cuts this year.

Kugler said during remarks at Washington University in St. Louis that she expects consumption growth to slow this year. “Households have drawn down large balances of excess savings accumulated during the pandemic and are facing restrictive financial conditions,” she said. “We may already be seeing some of that slowing.”

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Yet even with demand growth cooling, Kugler expects that “further disinflation can be accomplished without a significant rise in unemployment.”

In an interview with CNBC on Wednesday, Bostic said that “If the economy evolves as I expect, and that’s going to be seeing continued robustness in GDP and employment, and a slow decline in inflation over the course of the year, I think it will be appropriate for us to start moving down at the end of this year, the fourth quarter.”

Bostic, one of the Fed policymakers who vote on monetary policy, said he doesn’t expect the Fed to reach its target of 2% inflation before early 2026. “I think we have time to be patient, and we can just watch the economy and see if that’s how things actually play out,” he said.

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His sentiment echoed that of Fed Gov. Christopher J. Waller, who last week said “there is no rush to cut the policy rate,” and that it might be better to keep it at the current level for longer. “The risk of waiting a little longer to ease policy is small and significantly lower than acting too soon and possibly squandering our progress on inflation.”

Those views contrast with what two other Fed policymakers said in separate appearances on Tuesday, that they still expect three rate cuts this year.

Cleveland Fed President Loretta Mester said the disinflation process “won’t be a smooth path back to 2%,” and that more evidence will be needed to confirm that the process toward 2% is still on track. She said she doesn’t expect to have enough confidence to make that call by the Fed’s May meeting.

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Mester said she expects better economic growth in 2024, gross domestic product to increase at an above-average pace this year, and the labor market to stay strong

San Francisco Fed President Mary Daly pointed to the risk of keeping interest rates high for too long, even if inflation remains above the 2% target. She said policymakers must try everything within their power to “create a durable expansion,” without triggering a recession.

With the labor market still strong and no urgency to adjust the rate, “Standing pat is the right policy at the moment,” she said.

Fed members are still weighing in. Richmond Fed President Tom Barkin, Chicago Fed President Austan Goolsbee, and Cleveland’s Mester are each expected to give remarks on Thursday.

Write to Janet H. Cho at janet.cho@dowjones.com

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