Cleveland Fed President Loretta Mester said Tuesday the central bank could cut rates “later this year,” warning that cutting rates too soon would be a “mistake.”
“We are cutting interest rates too soon or too quickly without sufficient evidence that inflation is on a path back to 2% in a sustainable and timely manner,” Mester said in a speech in Columbus, Ohio. is wrong.”
But “if the economy progresses as expected, we will have that confidence in the second half of this year and then be able to start lowering rates.”
Mr. Mester is a voting member of the Fed’s Federal Open Market Committee, which decides whether interest rates should rise or fall, but he is expected to retire from his post in mid-2024 due to the Fed’s mandatory age and seniority policies.
He believes three rate cuts are still appropriate this year, in line with the median forecast from FOMC members in December. Investors are predicting five.
Loretta Mester, President of the Federal Reserve Bank of Cleveland; (Shannon Stapleton/Reuters) · Reuters/Reuters
Mester is the latest policymaker to put the brakes on Wall Street’s expectations for an aggressive pace of cuts in 2024.
That includes Chairman Jay Powell, who said in a press conference last week that a March rate cut is “probably not the most likely case, or what we would call the base case.” He said the same thing in an interview on “60 Minutes” that aired Sunday night.
Read more: What the Fed’s interest rate decisions mean for bank accounts, CDs, loans, and credit cards
A better-than-expected jobs report released on Friday means the central bank is now more likely to hold off on considering rate cuts closer to the second half of the election year. That puts the Fed on a collision course with figures on both sides of the political divide who are ready to attack Mr. Powell for cutting rates too soon or too late.
Those critics include Republican front-runner Donald Trump, who argued Friday that “it looks like the president is probably trying to lower interest rates to get people elected.”
The reason the Fed is considering cutting interest rates this year is because inflation has fallen more rapidly than expected over the past year. Mester said there are reasons to be cautious in assuming interest rates will continue to fall at the same clip.
He said the supply chain disruptions that accounted for much of the sharp decline are largely resolved and he does not expect them to have much of an effect on lowering inflation this year.
At the same time, he expects consumer spending to be subdued this year, especially as low-income households burn through savings accumulated during the pandemic.
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Another Fed official, Minneapolis Fed President Neel Kashkari, said separately on Tuesday that the Fed was still not on target. But he added that the U.S. is on track to avoid a recession this year and that inflation is on the right track based on the latest data from the past three and six months.
“Six months of data basically exists, three months of data basically exists,” Kashkari said during a question and answer session in Minnesota.
“I don’t necessarily want to say we’re going to jump through to 2%, but yeah, the data is looking positive.”
Neel Kashkari, President and CEO of the Federal Reserve Bank of Minneapolis. Reuters/Mike Seeger · Reuters/Reuters
Mester said the Fed is now in a risk management position to decide when to cut interest rates, noting that it does not want to undermine efforts to bring inflation back on track.
He would like to see the fall inflation experienced over the past six months continue, but not necessarily at the same pace.
He said that with a strong job market and continued strong consumer spending, the Fed is keeping interest rates at current levels to gather further evidence that inflation is sustainably returning to the central bank’s 2% target. He added that there will be an opportunity to maintain it.
“This could start easing too soon, undoing some of the gains we have made on inflation and destabilizing inflation expectations, putting us in a situation where we have to change course. It’s better than that.”
The risk is that if inflation expectations continue to decline in the year ahead, keeping interest rates at current levels for an extended period of time could act as a de facto tightening policy and worsen the job market.
Mester expects that if the Fed does start cutting rates, it will do so at a gradual pace, with the goal of keeping inflation in check while keeping the job market strong.
Mester also said the central bank will discuss at its March policy meeting the pace of tapering quantitative easing and when the Fed will start reducing the number of securities it includes in its portfolio.
Mester said he doesn’t think the Fed could move to slow its rate of rate cuts later this year and ultimately sell securities later.
He said the goal is for the balance sheet to consist primarily of U.S. Treasuries, as opposed to the mortgage-backed securities that are currently part of the portfolio.
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