Fed unlikely to cut rates soon despite softer inflation, New York president says

New York — Federal Reserve Bank of New York president John Williams welcomed the arrival of softer consumer inflation data, but said that positive news is not enough to call for the US central bank to cut interest rates soon.

While it is important not to overemphasise the latest economic news, the softer tone of April’s consumer price index (CPI) is “kind of a positive development after a few months when the data was disappointing” Williams said on Wednesday.

“The overall trend looks reasonably good” for a gradual slowdown in inflation pressures, Williams said. But he is still not sufficiently confident that price pressures are moving sustainably to the Fed’s 2% inflation target before lowering short-term borrowing costs.

Monetary policy is “restrictive” and “is in a good place”, Williams said. “I don’t see any indicators now telling me … there’s a reason to change the stance of monetary policy now, and I don’t expect that, I don't expect to get that greater confidence that we need to see on the inflation progress towards a 2% goal in the very near term.

“I don’t see any need to tighten monetary policy today,” Williams said, pouring water on speculation that the Fed might need to raise rates further to reduce inflation to desired levels.

The New York Fed leader, one of the top voices at the central bank who also serves as vice-chair of the rate-setting federal open market committee (FOMC), was interviewed after inflation data indicating a welcome slowdown, renewing Wall Street hopes the Fed might cut interest rates this year.

April’s headline CPI rose 3.4% from a year earlier, down from 3.5% in March, while prices excluding food and energy rose 3.6%, the smallest increase in three years.

Williams’ remarks offered his first extensive take on monetary policy and the economic outlook since the FOMC met this month and held the policy rate at 5.25%-5.5%, where it has been since July. Policymakers also announced they would slow the pace of their effort to shrink the central bank’s large balance sheet.

Growth moderates

This year, higher-than-expected inflation readings have complicated the Fed’s outlook for monetary policy. In March, officials pencilled in three rate cuts over the course of 2024, but sticky inflation has prompted them to back away from firm projections of rate cuts. Some officials have even mused about possible rate increases.

Further complicating the outlook, recent growth and hiring data have moderated, raising risks of a low-growth, high-inflation economy that would be thorny for Fed officials to navigate. Meanwhile, Wall Street bets on rate cuts have been volatile, with traders and investors now eyeing a first quarter-point cut in September and a second by the end of the year.

In comments on Tuesday, Fed chair Jerome Powell said, “I expect that inflation will move back down … on a monthly basis to levels that were more like the lower readings that we were having last year.”

Powell, too, pushed back on rate-increase prospects, saying “it is more likely … we hold the policy rate where it is”.

In his remarks, Williams said the economy remained on a solid footing and is coming into better balance. The labour market remains “tight” despite moving towards a better place primarily through the elimination of excesses, rather than through pushing up unemployment.

Williams said unemployment is likely to rise to 4% this year from the current 3.9%. Meanwhile, he said inflation by the Fed’s preferred measure — the personal consumption expenditures price index — is likely to be in the low 2% range by year end, putting it at about 2.5% for the year. He expects it to hit about 2% next year and remain there sustainably after that.

To change monetary policy, Williams said the Fed needs to have confidence inflation will hold at 2%, not for it to hit 2% before acting to cut rates. “It shouldn’t be that we’re at that 2% level because then we will have waited too long,” he said.

Williams also said the Fed’s balance sheet, which doubled in size on bond buying stimulus purchases, was still having some “modest” impact on bond yields as the central bank works to reduce the size of its holdings.

Reuters