Key Takeaways
- While Fed officials didn’t comment on President-elect Donald Trump’s proposed policies, they said the central bank was in a ‘good place’ to respond to economic developments.
- Officials said they closely monitor inflation to ensure it doesn’t reignite.
- While another interest rate cut at the December meeting seems on track, it’s unclear how many more could follow.
The Federal Reserve is likely on track to reduce borrowing costs further in December, as officials this week said the central bank is ready for any potential changes in the economy.
Federal Reserve officials cut their benchmark interest rate by a quarter-point last week. Economists expect the central bank to continue making cuts for the foreseeable future as long as inflation stays in check and the job market is resilient. In speaking engagements this week, Fed officials seemed to agree.
“With the economy now in a good place and interest rates off their recent peak but also off their historic lows, the Fed is in a position to respond appropriately regardless of how the economy evolves,” said Richmond Federal Reserve Bank President Tom Barkin at an event in Baltimore Tuesday. “After the challenges of the last several years, that’s a good place to be.”
Inflation Concerns Likely Won’t Slow The Rate Cut Cycle Yet
Federal Reserve officials have projected another quarter-point of interest rate cuts at its next meeting in December, something Minneapolis Federal Reserve Bank President Neel Kashkari said was likely still on track.
“There’d have to be a surprise on the inflation front to change the outlook so dramatically,” Kashkari said at a Yahoo Finance event Tuesday.
Kashkari’s comments came before Wednesday’s release of the Consumer Price Index (CPI), which showed a 2.6% annual inflation rate for October, just as economists had expected.
Voters cited inflation as one of their top issues when supporting President-elect Donald Trump. Some economists have said that his policies could exacerbate inflationary trends, though Fed officials say they aren’t taking those into account yet.
“We at the Fed simply have to wait and see whatever the Congress and the executive branch decide to do. We will then model it into our analysis of the economy, analysis of the economy’s potential and outlook for the labor market and inflation,” Kashkari said.
Interest Rates Could Stay Higher
Though more interest rate cuts may be in the outlook, it’s unclear how many times the Federal Open Market Committee (FOMC) will move to lower the federal funds rate.
Central bankers aim to reach an economic equilibrium where price pressures are controlled and the labor market is at full employment. Some economists think that the Fed could make several more cuts before hitting this level, often called the “neutral rate.”
However, Dallas Federal Reserve Bank President Lorie Logan said more caution may be needed.
“When I look at the available evidence, though, I see substantial signs that the neutral rate has increased in recent years and some hints that it could be very close to where the fed funds rate is now,” Logan said Wednesday. “If we cut too far, past neutral, inflation could accelerate, and the FOMC could need to reverse direction.”