The Federal Reserve is expected to lower its key interest rate by 25 basis points after this week's meeting. But should it do so? Former Kansas City Fed President George (Esther George) stated that she tends to vote against rate cuts. 'Now is a very cautious time,' she said in an interview on Tuesday.
Inflation has not slowed as it once did. First, the inflation rate in November had not yet fallen to the Federal Reserve's target. However, the Federal Reserve has made progress, as the inflation rate has significantly declined from the 40-year high in June 2022, which confirmed the reason for the Federal Reserve to begin its rate-cutting cycle in September. It initially cut rates by 50 basis points, surprising some. Then, the Federal Reserve announced a second rate cut in November: a modest reduction of 25 basis points.
Traders in the federal funds futures market largely expect the Federal Reserve to continue cutting rates by 25 basis points in December—over 95% are betting on this action. Fewer than 5% believe the Federal Reserve will keep rates unchanged, and no one thinks rates will be increased.
Therefore, while George tends to vote against rate cuts, she expects the Federal Reserve will eventually cut rates. Additionally, she explained that a 25 basis point rate cut will not determine the success or failure of inflation. Nevertheless, she believes it is time for the Federal Reserve to 'signal to the market and the public that they have not taken their eye off inflation.'
At the December meeting, in addition to possibly announcing a rate cut, Federal Reserve officials will also release their economic forecasts for the new year. 'I do think their expectations for the path of inflation will be adjusted,' George said, 'and I (also) think we will see some adjustments in the federal funds rate path to indicate that rate cuts will be slower and more gradual over the next year or so.'
It is currently unclear what changes the Federal Reserve's economic forecasts will undergo, which may indicate that interest rates will remain unchanged for the time being, and the impact of the Trump administration's policies also needs to be considered. Economists previously told (Fortune) magazine that they believe Trump's policies are inflationary, whether through his tariff threats or promises of mass deportations of illegal immigrants and further tax cuts. However, the Federal Reserve is very clear that it makes decisions based on data rather than expectations.
'The inflation rate is far above the 2% target and is now showing signs of stickiness, regardless of how precise people are about potential policies proposed for 2025,' George said.
She continued, 'If you are a risk manager at this time, considering what may happen in the future and the fact that the 2% inflation target has not yet been achieved, you would act cautiously to ensure you do not give up credibility in maintaining a low and stable inflation target. So I think now is the time to be careful.'
Powell himself stated earlier this month at the (New York Times) DealBook summit that the Federal Reserve may be 'more cautious' when it comes to cutting rates and acknowledged that the inflation rate is 'slightly higher' than expected. He clearly did not comment on what actions the Federal Reserve would take this week or how they view Trump 2.0, but he did say, 'We are now on a path to bring rates back to a more neutral level.'
Article shared from: Jinshi Data