by A top Federal Reserve official on Tuesday made the case for methodically reducing interest rates at some point this year as the economy balances out and inflation cools, although he acknowledged that the timing of those cuts remained uncertain. uncertain.
Christopher Waller, one of seven Washington-based Fed officials and one of 12 policymakers who can vote at its meetings, said during a speech at the Brookings Institution on Tuesday that he saw a case for cutting interest rates in 2024.
“The data we have received in recent months is allowing the committee to consider cutting the policy rate in 2024,” Waller said. While he noted that risks of higher inflation remain, he said, “I feel more confident that the economy can continue on its current trajectory.”
Waller suggested that the Federal Reserve should reduce interest rates as inflation falls. Because interest rates do not incorporate price changes, so-called real rates that adjust for inflation would otherwise rise as inflation decreases, thus weighing more and more on the economy.
“The healthy state of the economy provides the flexibility to lower” the monetary policy rate “to maintain the real policy rate at an appropriate level of adjustment,” Waller said in his speech.
The Federal Reserve governor added that when the policy rate is cut, “it can and should be reduced methodically and carefully.”
U.S. central bankers are contemplating their next policy actions after two years of battling high inflation. Officials raised borrowing costs from near zero in March 2022 to a range of 5.25 to 5.5 percent starting this summer. But now, inflation is steadily fading and central bankers are starting to contemplate when and how much they can lower rates.
While officials want to make sure they completely eradicate rapid inflation, they also want to avoid squeezing the economy so much with higher borrowing costs that they cause a painful recession.
Investors have begun to plot a good chances of rate cuts as soon as March, although some economists have warned (and officials have hinted) that they may be viewing an imminent move as too safe a bet.
“March is probably too early in my estimate for a rate drop,” said Loretta Mester, president of the Federal Reserve Bank of Cleveland. said in a recent interview with Bloomberg Television.
When Waller was asked Tuesday if he’d rather err on the side of waiting too long than cutting so soon, he said that “in the grand scheme of things, whether it’s six weeks later, it’s a little hard to believe that’s happening.” “Having a big impact on the state of the economy.”
Waller said that while his view of the monetary policy outlook was “consistent” with the Federal Reserve’s December projection that it would cut interest rates three times this year, “the timing of the cuts and the actual number of cuts in 2024 they will depend on the incoming monetary policy.” data.”
He said the timing of the first rate cut would depend on the Federal Reserve’s policy-setting committee.
Officials want to see evidence that progress continues, he said, “and I think it will, but we have to see it before we start making decisions,” he said.
Waller suggested he would be especially closely watching revisions to inflation data due in early February.
“My hope is that the reviews confirm the progress we have seen, but good policy is based on data and not hope,” he said.
