Fed official urges central bank to cut interest rates in 2024
A high-ranking member of the Federal Reserve has recently urged policymakers not to delay a rate cut next year.
In a recent interview, San Francisco Fed President Mary Daly said the central bank has been razor-focused on bringing inflation back down. But as borrowing costs begin to bite, she advocates for a more balanced approach.
“There is more work to do, and at this point, that work includes not only focusing on bringing inflation down to 2% [...] But also recognizing that we want to continue to do this gently, with as few disruptions to the labor market as possible,” Daly said, according to The Wall Street Journal.
In Daly’s view, keeping interest rates elevated as inflation moderates increases the risk of “overtightening”—or restricting economic activity more than the Fed intends.
To prevent this, the Fed needs to cut interest rates to ensure that real borrowing costs (adjusted for inflation) don’t rise.
Daly’s comments carry weight not only because of her job title at the San Francisco Fed. She’ll be a sitting member of the FOMC next year, which means she’ll vote on interest rates eight times in 2024.
Real borrowing costs are already rising
While Daly has flagged real borrowing costs as a future risk, there are signs it’s already becoming a problem.
For one, Creditnews Research's analysis of Fed data found that one-year inflation expectations have declined sharply from their peak in 2022 and currently sit at 3.3%. Inflation expectations three years ahead have also moderated from their pandemic levels.
Declining inflation expectations have pushed up real borrowing costs, as evidenced by the sharp rise in Treasury Inflation Protected Securities (TIPS) since the end of 2021. The 2-year TIPS is up over 500 points in the last two years, and the 10-year TIPS has increased by more than 350 points.
So, while the Fed has paused rate hikes, borrowing costs have still gotten more expensive.
“[T]he rise in real borrowing costs is undeniable and a sign that the medicine is working,” TD economist Brett Saldarelli wrote. “Higher borrowing costs have, in turn, reduced demand in interest rate-sensitive sectors of the economy.”
How low will the Fed go?
Predicting the Fed’s next move is notoriously difficult. Even the Fed’s own prediction tools are often wrong, so any forecast about where inflation, the economy, or interest rates are heading should be taken with a grain of salt.
That being said, the Fed’s latest “dot plot” projections show interest rates falling by 75 points by the end of 2024, from 5.5% to 4.75%.
But several major investment firms think a slower economy will force the Fed into deeper cuts. As Creditnews reported, asset managers UBS, Macquarie, ING, and Barclays are calling for cuts of between 100 points and 275 points next year.
While a 275-point cut may seem far-fetched today, it might be necessary if the economy stalls next year.
In fact, OECD economic projections show that the U.S. is expected to grow just 1.5% next year—much lower than the G20 average of 2.8%.
A high-ranking member of the Federal Reserve has urged policymakers not to delay a rate cut next year.
San Francisco Fed President Mary Daly said the central bank has been razor-focused on bringing inflation back down. But as borrowing costs begin to bite, she advocates for a more balanced approach.