The Federal Reserve’s timing for interest rate cuts this year has attracted significant attention in the market. Raphael Bostic, President of the Federal Reserve Bank of Atlanta, stated on Thursday that he still expects the Fed to initiate interest rate cuts in the third quarter. He warned against early rate cuts, as they could lead to a surge in demand and subsequent inflation.
Background:
After three consecutive pauses in rate hikes, the Federal Reserve has maintained the federal funds rate at a range of 5.25% to 5.50%. The market’s most optimistic expectation was for the Fed to start cutting rates in March. However, recent data released in the United States showed that December’s Consumer Price Index (CPI) rose by 3.4% year-on-year, exceeding market expectations and reducing the possibility of a rate cut in March.
Bostic, known for his dovish stance, urged caution in implementing rate cuts. He cited various unpredictable events, such as domestic elections and global conflicts, which could potentially impact the economy.
Openness to early rate cuts:
Bostic, who has voting rights on monetary policy this year, expressed his desire to see more signs of inflation returning to the target of 2%. Although he currently expects the Fed to start cutting rates in the third quarter, he indicated that he would be open to earlier rate cuts if inflation declines more rapidly than anticipated.
However, Bostic believes that in the current overall situation, the Fed should exercise caution. Early rate cuts could lead to a surge in demand and consequently put pressure on inflation. He does not want to undermine the significant progress made by the Fed in achieving its inflation target.
Bostic expects the Fed’s preferred gauge of inflation, the Personal Consumption Expenditures (PCE) price index, to decline to 2.4% this year, still above the Fed’s 2% target. The PCE in November 2021 was 2.6%, and Bostic’s forecast is still filled with uncertainty due to potential disruptions in the global supply chain caused by conflicts and risks faced by the United States, such as federal budget negotiations and elections.
Maintaining rates unchanged this month:
The next meeting of the Federal Open Market Committee (FOMC) will be held on January 31. According to the Fed Watch data from the Chicago Mercantile Exchange (CME), the market predicts a mere 2.6% probability of a 1-basis-point rate cut, while the probability of rates remaining unchanged is as high as 97.4%.
Furthermore, the interest rate dot plot released in December indicated that the Fed expects to cut rates three times in 2024, with each cut being approximately 25 basis points.
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