Top Fed official throws cold water on jumbo rate cuts
With pressure mounting on the Federal Reserve to begin cutting interest rates aggressively, Raphael Bostic says that’s not going to happen.
Speaking at a recent finance conference, the Atlanta Fed Bank President said he’s looking for “a little more data” before supporting rate cuts.
“We want to be absolutely sure” that cutting rates won’t lead to a resurgence of inflation, Bostic said. “It would be really bad if we started cutting rates and then had to turn around and raise them again.”
As in March, Bostic said he’ll likely be ready to support rate cuts “by the end of the year,” which means there’s no guarantee he’ll vote in favor of reducing rates at the Fed’s upcoming meeting in September.
Bostic’s comments carry extra weight because he’s a member of this year’s Federal Open Market Committee (FOMC) tasked with setting interest rates. Bostic will join ten other FOMC members in voting on policy in September, November, and December.
Bostic isn’t the only Fed official to push back against calls for jumbo-sized rate cuts. Earlier this month, Chicago Fed President Austan Goolsbee said the central bank is under no obligation to respond to market pressures.
To the ire of many economists, policymakers don’t seem supportive of rate cuts larger than the standard 0.25% move.
The Fed’s credibility is at stake
Many economists are frustrated by the Fed’s painfully slow response to a changing economy, but as Creditnews reported, policymakers are trying to avoid another embarrassment.
In 2021, central bankers told Americans not to worry about “transitory” inflation. Then the Consumer Price Index spiked to a 40-year high of 9.1%, putting the Fed in a reactionary position.
The Fed made mistakes in 2021, and it wants to avoid the same problems in 2024 and beyond.
After the Fed’s failed post-pandemic response, “you’re going to be more worried about your credibility. You don’t want to make the same mistake twice,” said Jan Hatzius, chief economist at Goldman Sachs.
“I think they are looking for an opportunity to lower the policy rate, but obviously, the wind [had] been blowing in the wrong direction,” said former St. Louis Fed president James Bullard, who now serves as the dean of Purdue University’s Daniels School of Business.
As Nick Timiraos of The Wall Street Journal reported, the central bank’s current approach to monetary policy amounts to “trust, but verify.” And verifying that inflation is heading in the right direction could take months.
The good news is that successive inflation reports have shown that cost pressures are subsiding. According to the Department of Labor, the Producer Price Index rose 2.2% annually in July, down sharply from June’s 2.7% annual rate.
More importantly, the stubborn service inflation category posted its first decline since last year.
The latest reports on the Consumer Price Index and the Fed’s preferred Personal Consumption Expenditures Index also show inflation heading in the right direction.