Fed Official Expresses Uncertainty About Interest Rates as Inflation Cools Off
Despite a recent cooling off of inflation, Susan Collins, President of the Federal Reserve Bank of Boston, is hesitant to join market traders in betting that the Federal Reserve’s campaign of rate hikes is over. In an interview on CNBC, Collins expressed the need for patience and resoluteness when it comes to the Federal Reserve’s next moves. While she acknowledged the encouraging data on inflation, she emphasized the importance of taking a holistic approach and not ruling out traditional firming actions.
This uncertainty underscores the challenging task faced by Collins and fellow policy-makers at the Fed. Since March 2022, the central bank has raised interest rates in an effort to combat rising inflation. However, setting rates at an appropriate level is a delicate balance. The Fed aims to quash inflation without causing a significant slowdown in the economy that could lead to a recession. Throughout history, recessions have often followed aggressive anti-inflation measures.
Collins and her colleagues are closely monitoring economic data for signs that inflation will reach the Fed’s target of 2% and remain there. Achieving this without triggering a recession and widespread layoffs would be a significant accomplishment. So far, unemployment has remained low even as inflation has decreased, fueling hopes for a soft landing rather than an economic crash.
Austan Goolsbee, President of the Chicago Fed, echoed these sentiments, stating that if the Fed manages to achieve a soft landing, their actions would be studied for years to come.
One crucial data point that officials are closely watching is rental rates, which contribute significantly to inflation measures. Recent months have shown a moderation in rental increases, following a period of dramatic growth during the pandemic. Although official inflation measures take longer to reflect these changes, Fed officials are hopeful that rental prices will exert downward pressure on inflation.
Despite Collins’s comments about the possibility of future rate hikes, market perceptions remain unchanged. Traders are currently pricing in a 0% chance of a rate hike at the upcoming Federal Open Market Committee (FOMC) meetings in December and January. Additionally, there is a 30% likelihood of a rate cut as early as March, according to the CME Group’s FedWatch tool, which predicts rate hikes based on futures trading data.
In summary, while inflation is showing signs of cooling off, Federal Reserve officials remain cautious about concluding that interest rate hikes are no longer necessary. The endeavor to strike the right balance between combating inflation and maintaining economic growth continues to be a top priority for policymakers at the Fed. As they monitor data, particularly rental rates, the possibility of achieving a soft landing without a recession remains a challenging yet hopeful objective.
