Federal Reserve officials have strongly suggested that interest rates will likely remain at their current levels for an extended period, as policymakers adopt a cautious approach while monitoring the economic landscape and persistent inflation, Bloomberg reports.
This sentiment was echoed by multiple Fed voices this week, including Boston Fed President Susan Collins, Governor Michelle Bowman, and Kansas City Fed President Jeff Schmid.
The central bank’s strategy hinges on the pace of inflation cooling. While the Fed has made progress in its battle against rising prices, officials indicate they will not be hasty to lower rates again until inflation convincingly moves towards their 2% target. The Fed’s preferred inflation measure, which excludes volatile food and energy prices, rose 2.8% in the year through November, still above the target.
The Fed’s “policy is well positioned to adjust as required to evolving conditions – holding at the current level for longer if there is little further progress on inflation,” Collins said at an event in Boston Thursday, emphasizing that there was “considerable uncertainty” regarding the economic outlook.
She also acknowledged that progress on cooling inflation was likely to be slower this year than previously anticipated.
Governor Michelle Bowman similarly emphasized the need for a deliberate approach. “I continue to prefer a cautious and gradual approach to adjusting policy,” she said, noting that lingering inflation risks justify a more measured pace of rate cuts. While Bowman voted for a rate cut in December, she said she could have supported holding steady, highlighting the fine line the central bank is trying to walk.
The possibility of new economic policies from the upcoming Trump administration and a Republican-controlled Congress adds another layer of complexity to the economic picture, according to Collins. While the exact impacts are still unknown, they may shift the economy’s trajectory, she said.
Kansas City Fed President Jeff Schmid, who also votes on policy this year, believes rates may already be close to a level that is neither too stimulative nor too restrictive.
While some officials, like Philadelphia Fed President Patrick Harker, foresee the possibility of additional rate cuts in 2025, the timing is entirely dependent on incoming economic data.
The Fed lowered its benchmark interest rate by a full percentage point throughout 2023, with a final quarter-point reduction in December. However, many officials now believe it’s prudent to slow the pace of further cuts, citing persistently high inflation and a healthy labor market.
Investors appear to be aligned with this expectation. Futures contract pricing indicates that the markets largely expect policymakers to hold rates steady at the upcoming Fed meeting on January 28-29.
Despite ultimately supporting the December cut, Collins acknowledged it was a “close call.” She said it provided additional insurance to keep the labor market healthy while maintaining the restrictive stance needed to restore price stability.
