Fed policymakers wary of inflation risks as they weigh more rate cuts

Ann Saphir

Updated Wed, November 13, 2024 at 12:03 PM EST 4 min read2

By Ann Saphir

(Reuters) -After a scare earlier this year that the U.S. labor market might be cooling too fast, some Federal Reserve policymakers are shifting their attention back to inflation risks as they weigh when, and how fast and far, to cut interest rates.

Government data released on Wednesday showed consumer prices rose 2.6% in the 12 months through October, above the U.S. central bank’s 2% goal but in line with economists’ expectations. Traders in financial markets piled into bets that the Fed’s policy-setting Federal Open Market Committee, fresh from last week’s quarter-percentage-point rate cut, will go ahead with another reduction in borrowing costs at its Dec. 17-18 meeting.

But Fed policymakers on Wednesday signaled they haven’t yet made up their minds, holding open the door to a go-slower approach in the face of data showing the labor market is softening but remains healthy, even as price pressures remain.

After having made “a great deal of progress” in bringing inflation down from 40-year highs, Dallas Fed President Lorie Logan told an energy conference at her regional bank, “I anticipate the FOMC will most likely need more rate cuts to finish the journey.”

But, she added, it’s “best to proceed with caution,” noting that “if we cut too far, past neutral, inflation could reaccelerate and the FOMC could need to reverse direction.”

The Fed cut its policy rate by half a percentage point in September after a sharp slowdown in job growth and a rise in the unemployment rate raised concerns about a potential recession. Subsequent stronger labor market data suggested those fears were overblown, and with inflation continuing to fall – by the Fed’s targeted measure it registered 2.1% in September – the central bank cut its benchmark overnight interest rate by a quarter of a percentage point last week.

The policy rate is now in the 4.50%-4.75% range. And that, Logan said, is now “right at the top” of the estimated range of the neutral rate of interest where the cost of money acts neither as a headwind nor a tailwind for economic growth.

Logan did not speak directly to her view on the appropriateness of a rate cut at the Fed’s meeting next month, but her remarks suggest she is among the policymakers who would prefer to slow down on cuts sooner rather than later.

She noted upside risks to inflation, including from a possible post-election surge in business investment, as well as from consumer spending. Logan said she feels the labor market, with an unemployment rate of 4.1%, is cooling but not deteriorating materially.

And while she said a recent rise in Treasury yields could slow the economy more than the Fed intends, posing a downside risk to employment, she also said that because the neutral rate has likely risen in recent years, U.S. monetary policy may not be braking the economy as much as it might appear.

RIGHT DIRECTION

Minneapolis Fed President Neel Kashkari, in an interview with Bloomberg TV, likewise noted the possibility that the neutral rate has risen, which suggests the Fed will not need to cut rates as much as it otherwise would.

The consumer price index data released on Wednesday, he said, seems to show that inflation is headed in the right direction.

“I’ve got confidence about that, but we need to wait,” he added. “We’ve got another month or six weeks of data to analyze before we make any decisions.”

Kashkari earlier this week said it would be unlikely that the labor market could weaken enough to affect the Fed’s policy decision at its next meeting. Opting to hold rates steady instead of cutting at that meeting, he said, would hinge on inflation data.

Analysts saw the latest inflation data as no barrier to a rate cut in December, particularly because some of the strength in prices came from housing inflation, which Fed officials, pointing to a continuing decline in new leases, have expressed confidence will ebb.

The Fed will get one more CPI reading before the December meeting.

Fed Chair Jerome Powell will give his views on the economy and prospects for rate cuts ahead in a speech on Thursday in Dallas.

(Reporting by Ann Saphir; Editing by Paul Simao)