Fed policymakers urge more patience as policymakers await further signs of easing inflation
- Federal Reserve officials await more “good inflation” data before cutting rates.
- Jerome Powell reiterates data-dependent approach, says they will make decisions meeting by meeting.
- Federal Reserve policymakers are divided over the timing of the policy pivot.
Federal Reserve (Fed) left the policy rate unchanged at 5.25%-5.5% following the June policy meeting, as expected. The revised Summary of Economic Projections (SEP), the so-called dot plot, showed that policymakers were divided over the near-term rate outlook. Four of 19 officials saw no rate cuts in 2024, seven projected a 25 basis points (bps) rate reduction, while eight marked down a 50 bps cut in the policy rate.
Fed policymakers speak on inflation and rate outlook
Fed Chairman Jerome Powell refrained from hinting at the timing of the rate reduction in the post-meeting press conference. “We need further confidence, more good inflation readings but won’t be specific about how many to start rate cuts,” Powell explained.
Following the Fed event and May inflation data, the probability of the Fed leaving the policy rate unchanged in September declined toward 30% from 50%, according to the CME FedWatch Tool.
With the Fed’s blackout period coming to an end after the June meeting, investors will pay close attention to comments from policymakers in the near term.
Cleveland Fed President Loretta Mester said that she would like to see a “longer run of good-looking inflation data,” and Minneapolis Fed President Neel Kashkari stated over the weekend that it would be a “reasonable prediction” that the Fed will wait until December to cut interest rates, adding that the central bank is in a very good position to get more data before making any decisions. Meanwhile, President of the Philadelphia Fed, Patrick Harker, leaned into a cautious stance on Monday, noting that the Fed may need to keep rates where they are for longer than markets currently hope.
On Tuesday, New York Fed President John Williams adopted a neutral voice, telling Fox Business that he expects interest rates to come down gradually as inflation eases.
Boston Fed President Susan Collins followed closely on Fed Williams’ heels, noting that despite significant progress on inflation, price growth remains stubbornly above the Fed’s 2% inflation target. Fed Collins reiterated the need to avoid overreacting to recent inflation data, stating that it is still too soon to say whether or not inflation is truly on its way back to 2%.
Fed Board of Governors member Adriana Kugler followed up on Tuesday, noting that inflation progress remains gradual, but highlighted that the US central bank expects only a slight softening of the US labor market as interest rates take small chunks out of inflation.
Newest Fed member, Alberto Musalem, the fresh President of the St. Louis Fed, joined the chorus of cautious Fed officials on Tuesday, highlighting his willingness to tighten policy further if inflation figures were to become stuck above the Fed’s 2% target. St. Louis Fed President Musalem also cautioned that it could take months or even entire quarters before Fed policy finishes up the battle with above-target inflation.
Following her colleagues’ line, President of the Dallas Federal Reserve Bank Lorie Logan remarked on Tuesday that the recent data indicating a slowdown in inflation is “encouraging,” but emphasized that the Fed must remain cautious and patient regarding interest-rate policy.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.