Fed Officials, Aligned with 'Hawkish' Powell, Say "More Data Needed Before Pivot"

Neel Kashkari, President of the Minneapolis Fed
"Neutral interest rate rising... Data assessment needed before rate cuts"
'Dovish' Chicago Fed President "Additional indicators must be checked"

Officials of the U.S. central bank, the Federal Reserve (Fed), have repeatedly expressed the need for a cautious approach regarding interest rate cuts. Just one day after Fed Chair Jerome Powell reaffirmed that a rate cut in March is premature, Fed officials echoed the same sentiment, warning against market optimism. Meanwhile, the Organisation for Economic Co-operation and Development (OECD) forecasted that the U.S. would begin cutting rates in the second quarter of this year.

Neel Kashkari, President of the Minneapolis Federal Reserve Bank

Neel Kashkari, President of the Minneapolis Federal Reserve Bank, stated on the Fed's website on the 5th (local time) that due to the possibility of a rise in the 'neutral rate,' there is no need for the Fed to start cutting rates early.

He said, "It is possible that the neutral rate has increased at least during the recovery period following the pandemic," adding, "The risk that the current overly tight policy will hinder economic recovery is low. The Federal Open Market Committee (FOMC) should allow time to assess incoming economic data before beginning to cut the federal funds rate."

The neutral rate mentioned by Kashkari is the theoretical interest rate level at which the economy can achieve its potential growth rate without overheating or recession. For central banks, aligning the benchmark interest rate close to the neutral rate is a key task. Despite the Fed raising the benchmark rate to between 5.25% and 5.5%, the U.S. economy has maintained solid growth, leading to analyses suggesting that the neutral rate has risen. Kashkari's remarks indicate that due to the possibility of a higher neutral rate, the current monetary policy is not excessively tight, and further data confirmation is necessary.

Ostan Goolsby, President of the Chicago Federal Reserve Bank (Fed)

Austin Goolsbee, President of the Chicago Federal Reserve Bank and considered a prominent dove (favoring monetary easing) within the Fed, also expressed the view that additional data verification is needed before a pivot (direction change).

In an interview with Bloomberg TV that day, he said, "We have received quite good inflation reports near or even below the Fed's target over the past seven months," adding, "So if we continue to get data like what we have obtained, I believe we should enter the path to normalization." He also made it clear that he does not want to speculate on the Fed's specific rate path or the possibility of a 0.5 percentage point rate cut at a particular time ahead of the March FOMC meeting.

The remarks of these two Fed officials align with those of Chair Powell, who dismissed early rate cut prospects both at the first FOMC meeting of the year and the day before. On the 5th, Powell appeared on CBS in the U.S. and said, "We want to see more evidence that inflation is steadily falling to 2%," adding, "Our confidence is growing. We just want more confidence before taking the very important step of starting rate cuts." After the FOMC meeting on the 31st of last month, he also stated, "I think it is unlikely that we will reach a level of confidence to be sure about a rate cut by the March meeting," emphasizing the need to confirm additional signs of inflation slowdown.

With signals that the U.S. labor market remains hot, market expectations for rate cuts are retreating. According to the U.S. Department of Labor, nonfarm payrolls increased by 353,000 in January compared to the previous month, more than double the expert forecast of 185,000, marking the largest increase in a year. Currently, according to the Chicago Mercantile Exchange (CME) FedWatch, the rate futures market reflects about a 16% chance that the Fed will cut rates by 0.25 percentage points at the March FOMC. This is a significant drop from 20% the day before and 64% a month ago. The probability that the Fed will cut rates by 0.5 percentage points or more in May has fallen to the 62% range, down from 73% the previous day and 95% a month ago.

There are also expectations that the Fed will begin cutting rates in the second quarter. The OECD forecasted that U.S. inflation is being controlled and that the Fed could start cutting rates in the second quarter. According to the OECD, the U.S. inflation rate is estimated to be 2.2% this year and 2% in 2025, the lowest among the Group of Seven (G7) countries.

Meanwhile, as Fed officials repeatedly drew a line against early rate cuts, the U.S. stock market fell across the board that day. On the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed down 0.71% compared to the previous session. The S&P 500 and Nasdaq indices fell by 0.32% and 0.2%, respectively.

This content was produced with the assistance of AI translation services.