Several Federal Reserve officials reiterated on Wednesday that they were deeply uncertain about how much they would need to cut interest rates, highlighting the difficulties policymakers face in trying to determine the right setting to keep the economy on an even keel.
"While now is the time to start unwinding the restrictiveness of monetary policy, it remains to be seen how much further rates will fall, or where they will ultimately go," Kansas Fed President Jeff Schmid said in a speech at an energy conference co-hosted by the Dallas Fed. Comments like Schmid's are becoming a mantra among Fed officials. Many have said they believe the neutral rate -- the level at which rates neither boost nor suppress economic growth -- has likely risen since the pandemic. But no one has expressed confidence in where the neutral rate will be.
“Importantly, uncertainty about the neutral rate has also risen, perhaps because the changes in the structure of the economy are relatively recent and will take time to be fully assessed,” Dallas Fed President Lorie Logan said in separate remarks at the same conference.
The uncertainty weighs heavily on Fed officials because of the risk of reigniting inflation if rates rise above neutral, which could lead to more caution and a pause in rate-cutting cycles.
Logan said "widely consulted models" put the neutral federal funds rate at between 2.74% and 4.6%. Currently, the midpoint of the Fed's policy rate is at the upper end of that range.
She added that she believes more rate cuts are coming but that the Fed "should proceed with caution for now."Federal Reserve speakers on Wednesday also generally expressed confidence that inflation will still move down toward the 2% target after a report showed inflation in October was roughly in line with economists' expectations.
“Right now, I think inflation is moving in the right direction. I have confidence in that, but we need to wait,” Minneapolis Fed President Neel Kashkari said in an interview. “We have another month or six weeks of data to analyze before we make any decisions.”
Kashkari said on Tuesday that if inflation data surprises on the upside between now and the Fed’s December meeting, he might support pausing to cut another quarter point in interest rates. The Fed cut its benchmark rate by 50 basis points in September and another quarter point this month.
The consumer price index (CPI) released on Wednesday showed that the core CPI index, which excludes food and energy costs, rose 0.3% for the third consecutive month. The overall CPI rose from the same period last year.
The Fed's central bank rose 2.6% in early trading, the first year-over-year gain since March. Investors increased bets on another rate cut at the Fed's December meeting after the new data. Swap dealers raised their odds of another rate cut on Dec. 18 to around 80% from around 56% earlier on Wednesday. They are pricing in a cumulative rate cut of just over 60 basis points by June next year.
St. Louis Fed President Alberto Musalem said in a speech in Memphis that the Fed is on track to achieve its inflation and employment goals, but he stressed that officials should keep policy “moderately restrictive” while price growth remains above their 2% target.
"In my baseline scenario, based on current information, I expect inflation to move toward 2% over the medium term," he said, but added that officials should "carefully and patiently" assess incoming economic data as they consider further rate cuts.
In a question-and-answer session after his speech, Moussallem said recent information suggests that inflation may stagnate on its downward path and the risk of even moving higher has risen.
He said the data suggested the economy was “stronger, perhaps materially stronger than it had been” and that some measures of inflation were “moving a little bit higher.” Still, he said the Fed’s policy was well prepared.
