Federal Reserve policymakers meet June 11-12, but almost no one expects that they’ll cut interest rates. Market watchers generally agree that the Fed is unlikely to move on rates until late 2024 at the earliest.
With investors hyperfocused on inflation, Minneapolis Federal Reserve President Neel Kashkari garnered headlines when he told CNBC in late May that rate hikes look unlikely. Asked what conditions were needed for the Fed to cut rates once or twice this year, Kashkari said: “Many more months of positive inflation data, I think, to give me confidence that it’s appropriate to dial back.
A couple days later, Fed watchers listened carefully when Federal Reserve Bank of New York President John Williams spoke to the Economic Club of New York on May 30. Williams said he expects inflation to continue falling in the second half of this year, adding that elevated borrowing costs are restraining the economy.
Williams acknowledged that inflation remains above the central bank’s target. But he also said the Fed has effective tools for managing the post-pandemic economy.
“The behavior of the economy over the past year provides ample evidence that monetary policy is restrictive in a way that helps us achieve our goals,” he said.
When it came to the Fed’s next move, Williams was predictably inscrutable. A rate increase is unlikely, he said – but in a panel discussion following his scripted speech, Williams said he couldn’t say when he’d be likely to support a rate cut. Such a recommendation would be based on economic data, Williams said.
“I don’t feel any urgency or need that we have to make a decision now,” he said.
While inflation has proven resistant to the Fed’s efforts to bring it down to 2%, Williams said he didn’t view recent price data as a sign that inflation is no longer heading lower. Williams said earlier in May that monetary policy is working effectively.
Meanwhile, data released in late May showed the U.S. economy expanded at a slower pace during the first quarter than initially reported. Williams predicted that inflation, as measured by the personal consumption expenditures price index, will decline to 2.5% by the end of 2024 on its way to 2% in 2025. He expects the jobless rate to climb to 4% in late 2024 before drifting down to 3.75%.
Fed officials have signaled interest rates will stay high for some time. Central bankers have left their benchmark rate in a target range of 5.25% to 5.5% since July 2023.
“We have seen a great deal of progress toward our goals over the past two years,” Williams said.
By that, he meant that the Fed managed to rein in prices after inflation shot all the way to 9%. But investors would be wise to remember what Williams left unsaid – inflation soared to its highest level since the bad old days of the 1980s even as Fed policymakers had their hands firmly on the steering wheel.Investors would be wise to remember that it’s nearly impossible to accurately forecast the path of interest rates and the economy, particularly in the aftermath of a shock like the COVID-19 pandemic.
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