Fed Officials Hint At More Aggressive Rate Cuts in Coming Months

Some Federal Reserve officials are signaling that they want to see significantly more rate cuts in the future.

Chicago Fed President and CEO Austan Goolsbee at the National Association of State Treasurers annual conference on September 23, 2024, said, “At a moment like this, it’s important for the Fed to think beyond the short run and identify the through lines of the economy. That longer arc said it was time to act and suggests there will be more to come.”

He argued that while inflation is far down from its peak — the most recent Consumer Price Index report showed year-over-year inflation of 2.5%, so nearing the Fed’s 2% target — and unemployment at 4.2% is considered sustainable full employment, interest rates are still the highest they’ve been in a year.

Goolsbee further said that higher rates are fine if the intent is to cool the economy, but too high to maintain current levels. His concern, which Chair Jerome Powell has also said, is the need to keep the labor market at full employment.

“Of course, getting the timing right at moments of transition is maybe the hardest challenge a central bank faces,” Goolsbee said. “It’s especially hard at a moment like this where conditions are so different from previous cycles. But knowing that labor markets tend to deteriorate quickly when they turn and that monetary policy takes time to act, it’s just not realistic to wait until problems show up.”

The discussions at the Fed and elsewhere involve questions about the so-called neutral interest rate, which is the rate that neither restricts nor encourages the economy. But while there are methods to try estimating it, there is no way, in theory, to directly measure it.

Atlanta Fed President Raphael Bostic, during a virtual event of the European Economics and Financial Centre on Monday, said, “I don’t know anyone who would plausibly argue with the notion that we are a fair distance above it,” as Bloomberg reported. The statement suggested that the Fed would need to cut rates more to reach neutral.

Minneapolis Fed President and CEO Neel Kashkari wrote on Monday that he supported the initial 50-basis-point cut but that the “economy continues to offer mixed signals about its underlying strength.” While he sees the Fed’s position as still “tight,” Kashkari noted that there could be recessionary forces and potential upside to inflation.

That complicates the course forward for the central bank. A move toward a recession would suggest lower rates to stimulate the economy. An inflationary increase would need the opposite, with higher interest rates.

Reuters reported that price pressures picked up in September at the fastest rate in the last six months, which could suggest that inflation could increase in the immediate future.