Federal Reserve Official Urges Patience on Interest Rate Cuts Amid Strong Economic Data
In a recent speech at the University of St. Thomas, a Federal Reserve official emphasized the need for patience when it comes to interest rate cuts. The official, whose views are his own and not necessarily representative of the Federal Open Market Committee, highlighted the strong economic data that has been received in recent months.
The official began by acknowledging the positive economic indicators that were present in January. Measures of core personal consumption expenditures (PCE) inflation were running at 2 percent, which is the goal for total inflation. The labor market was also healthy, and real gross domestic product (GDP) was growing, although expected to moderate in the fourth quarter. Based on this data, the official argued that there was no rush to cut interest rates.
However, since that time, new data has been released that has exceeded expectations. Fourth quarter GDP growth came in at 3.3 percent, well above forecasts. Job growth in January was also higher than expected, with 353,000 jobs created. Additionally, monthly core CPI inflation was 0.4 percent, much higher than previous months.
This new data has reinforced the official’s view that it is important to verify the progress on inflation before making any decisions on interest rate cuts. While there is no rush to cut rates, the official still expects that policy easing will occur this year. The focus now is on collecting more data and ensuring that inflation remains on track.
The official also discussed the outlook for economic activity based on recent data. Real GDP grew strongly in the second half of 2023, and forecasters predict continued solid growth in the first months of 2024. The Institute for Supply Management’s survey of purchasing managers showed moderate growth in non-manufacturing businesses and improvement in the manufacturing sector.
However, there are some signs of slowing growth. Retail sales fell in January, which may be attributed to bad weather and seasonal adjustment issues. Consumer spending, which was higher than expected in the second half of 2023, may be showing the effects of higher interest rates and a depletion of excess savings.
Despite these signs of slowing growth, the labor market remains strong. Job growth in January was widespread across different sectors of the economy, and unemployment is at a historic low of 3.7 percent. Average hourly earnings have also increased, indicating continued demand for labor.
The official then turned to the topic of inflation. While there has been progress in reducing inflation over the past year, recent data shows an uptick in CPI inflation. Core PCE inflation is estimated to have risen to a 12-month rate of 2.8 percent. The official emphasized the need to put this uptick into perspective, noting that inflation has fallen by more than half since a year ago.
The official will be closely monitoring measures of wages and compensation to determine if progress on inflation continues or stalls. Goods prices and housing costs are also important factors to consider. The official acknowledged that there are predominately upside risks to inflation, but also noted that there is little reason to expect inflation to run below 2 percent for an extended period.
Based on this outlook, the official believes it is appropriate to be patient when it comes to monetary policy. While there are no indications of an imminent recession, the official will continue to monitor economic activity and employment for any unexpected warning signs. The decision to begin easing policy will depend on incoming data, and the official expects that policy easing will occur sometime this year.
In conclusion, the official emphasized the need for patience and careful consideration when it comes to interest rate cuts. The strength of the economy and recent data on inflation support this approach. Rushing into rate cuts could jeopardize progress on inflation and harm the economy. With solid economic fundamentals, there is no need to rush.
