The US Federal Reserve (Fed) is within striking distance of reaching its long-term inflation target and could begin cutting interest rates this year, according to a senior official. Fed Governor Christopher Waller expressed confidence that the Fed is close to achieving a sustainable level of two percent PCE inflation, the Fed’s favored inflation gauge. Recent data has supported Waller’s belief that inflation is on the right path, leading to speculation that rate cuts may be on the horizon. Waller believes that as long as inflation remains moderate, the Federal Open Market Committee (FOMC) will be able to lower interest rates later this year. He emphasized the importance of methodically and carefully lowering rates to avoid any potential negative repercussions. Futures traders have assigned a high probability that the Fed will hold interest rates steady later this month and begin cutting rates in March. The Fed’s balance sheet has reduced to around $7.7 trillion since the implementation of quantitative easing during the Covid-19 pandemic. Waller also hinted at the possibility of tapering the reduction of the balance sheet in the coming year. He downplayed concerns about Yemen’s Houthi rebels’ attacks in the Red Sea, stating that there are alternative routes. Overall, Waller’s comments indicate a potential shift in monetary policy that could have significant implications for the US economy.
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