"Early Interest Rate Cuts Not Allowed" Fed Expresses Caution...Indicators Remain Strong (Comprehensive)

"Do not expect an immediate cut in the benchmark interest rate." "I believe a cut later this year would be appropriate." Voices cautioning against early rate cut expectations are pouring out from officials of the U.S. Federal Reserve (Fed).

[Image source=Reuters Yonhap News]

Patrick Harker, President of the Philadelphia Federal Reserve Bank, said in opening remarks at an event held in Delaware on the 22nd (local time), "I see the possibility of a rate cut this year," but added, "I want to caution those who want a cut right now." While agreeing with the policy of a cut within the year, he explained that it would not be as early as the market expects.

President Harker expressed concerns that rushing a rate cut could cause inflation to rebound. He likened the current situation to "the last mile of a marathon to achieve the 2% inflation target," emphasizing, "The biggest economic risk is lowering rates too early, causing inflation to surge and undoing the efforts of the past two years right before our eyes."

He also welcomed recent progress on inflation but reiterated, "Such progress is sometimes rough and uneven, so more evidence needs to be confirmed." Harker does not have a voting right at this year's Federal Open Market Committee (FOMC). However, during the discussion after his speech, he did not completely rule out the possibility of a rate cut in May.

Christopher Waller, a Fed Governor, also expressed concerns about the possibility of inflation rebounding. Holding voting rights at this year's FOMC, he referred to the January Consumer Price Index (CPI) that exceeded expectations during a speech in Minneapolis, saying, "It could just be a road accident, but it might be a warning that significant inflation progress over the past year could be delayed."

Governor Waller said there are hardly any signs that the 2% inflation target will be achieved soon, adding, "Before determining whether January was a speed bump or a pothole, we need to look at inflation indicators for at least two months." He continued, "I still believe it is appropriate to start monetary easing this year, but the timing and number of rate cuts depend on the incoming data," and added, "The conclusion is that the FOMC can wait a bit longer before easing (cutting rates)."

On the same day, Philip Jefferson, the Fed's second-in-command, said in a speech at the Peterson Institute for International Economics in Washington, D.C., "If the economy moves broadly along the expected path, it would be appropriate to start cuts later this year." Jefferson estimated that the January Personal Consumption Expenditures (PCE) price index rose 2.4% year-on-year, slowing from the previous month's increase of 2.6%. The January PCE, the Fed's preferred inflation gauge, is scheduled to be released on the 29th.

Fed Governor Lisa Cook also stated, "I want to have stronger confidence that inflation is heading toward 2% before starting rate cuts," indicating that it is not yet time to cut rates. Earlier, the minutes of the January FOMC meeting released by the Fed on the 21st confirmed a cautious stance that the current rate of 5.25-5.5% should be maintained until a clear slowdown in inflation is confirmed.

The economic indicators released that day also added weight to the view that early rate cuts would not occur as much as the market expects. The February U.S. Manufacturing Purchasing Managers' Index (PMI) released by S&P Global was 51.5, marking the highest level in 17 years. This figure far exceeded both the previous month (50.7) and the February expert forecast (50.5). The weekly initial jobless claims released on the same day were also at a five-week low of 201,000, indicating a robust labor market.

While expectations for a March cut were widespread earlier this year, the market now favors cuts in June or July. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market reflects more than a 60% chance that the Fed will cut rates by at least 0.25 percentage points at the June FOMC meeting. The forecast that rates will remain unchanged until July stands at around 16%.

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