Fed Members Cool On Raising Interest Rates: 'These Conditions Could Take Months, And More Likely Quarters To Play Out'

Zinger Key Points
  • More time is needed to get inflation down, Fed members say.
  • The Fed might begin easing policy sometime later this year, Federal Reserve Gov. Adriana Kugler says.

Members of the Federal Reserve have indicated that they are in no rush to raise interest rates in speeches given on Tuesday.

We’re Clearly On The Backside Of Inflation

Federal Reserve Bank of Richmond President Thomas Barkin said he needs to see more progress in getting inflation sustainably down to the central bank's 2% annual target before considering changing interest rates, which stand between 5.25% and 5.5%.

He said that inflation slowed sharply in the second half of 2023, but then it “stalled sideways” in the first few months of 2024, Barron’s reported.

May inflation data, released on June 12, was a promising step, he said, but he pointed to stubborn inflation in services categories of inflation indexes, while goods prices have cooled off. Shelter and housing inflation has been “another sticky part of the consumer price basket,” he said.

"We're clearly on the backside of inflation," Barkin said during a virtual discussion with Pedro da Costa, a senior reporter at Market News International. He credited both restrictive monetary policy and normalizing supply chains for the improvement.

"But the question is, ‘Are we all the way back?’" Barkin noted. "I think it’s hard to know how much signal to take from the last half of last year, how much signal you take from the first quarter of this year, or how much signal you take from the most recent couple of weeks."

Also Read: Privately Held Companies Are 50% More Profitable Than Publicly Traded Firms: Fed Study

Barkin is a current voting member of the Federal Open Market Committee (FOMC), the Fed's policy-making body. He has served as president of the Richmond Fed since 2018.

“Economic Conditions Are Moving in the Right Direction

Inflation is showing encouraging signs of cooling, and though it is too high, U.S. Federal Reserve Gov. Adriana Kugler said on Tuesday that as long as economic conditions continue moving in “the right direction,” it will be okay to cut interest rates later this year, Reuters reported.

While more progress is required on moving inflation back to the Fed’s 2% target, “I believe economic conditions are moving in the right direction,” Kugler said in the prepared text of a speech titled, “Some Reasons for Optimism about Inflation.”

“If the economy evolves as I am expecting, it will likely become appropriate to begin easing policy sometime later this year,” said Kugler, who described the Fed’s current interest rate setting as “sufficiently restrictive” to cool activity and lower inflation.

Her comments were her first public remarks since last week’s Fed policy meeting, when the central bank kept its benchmark interest rate in the 5.25%-5.50% range, according to Reuters.

Kugler cited several factors about inflation that are supporting her optimism, including indications of smaller price markups, less frequent price changes, stable inflation expectations and anecdotes from businesses that price increases are becoming harder to push through as consumers become more price sensitive and exhibit “trading down” behavior.

Demand is also showing signs of softening, she said, noting that the weaker-than-expected retail sales report for May published earlier on Tuesday “may be another signal that the long-expected deceleration in consumer spending may finally be upon us.”

“It Is Too Soon To Determine

Federal Reserve Bank of Boston President Susan Collins said the U.S. central bank should be patient as it considers when to lower interest rates, despite recent encouraging data on inflation, Bloomberg reported.

"It is too soon to determine whether inflation is durably on a path back to the 2% target," Collins said Tuesday in remarks prepared for an event in Lawrence, Massachusetts. "We should not overreact to a month or two of promising news."

"The appropriate approach to monetary policy continues to require patience," she added, echoing remarks she made at an Atlanta Fed conference on May 21, according to Bloomberg.

She said the data suggest an economy with demand and supply coming into better balance, as needed to restore price stability. "However, this process may just take more time than previously thought."

New York Fed President John Williams made similar remarks on Tuesday, Bloomberg reported, saying the U.S. economy is "moving in the right direction" but stopping short of saying when he would favor an interest-rate decrease.

“It Takes More Than One Data Point To Establish A Trend

Federal Reserve Bank of St. Louis President Alberto Musalem suggested U.S. interest-rate cuts could be delayed for some time, saying it's more likely to take "quarters" not months to see data to support a reduction, Bloomberg reported.

The Fed also needs to consider and explain to the public the possibility of alternative economic scenarios, Musalem said Tuesday in his first speech on monetary policy since taking the helm of the St. Louis Fed earlier this year. Additional rate hikes could be necessary if inflation progress stalls or reverses, he said. 

"I will need to observe a period of favorable inflation, moderating demand and expanding supply before becoming confident that a reduction in the target range for the federal funds rate is appropriate," he said in remarks prepared for an event in St. Louis, according to Bloomberg. "These conditions could take months, and more likely quarters to play out."

Musalem didn't specify his forecast for rates, though his speech suggested he is among the officials that anticipate one or no cuts this year.

Still, he cited "potential early signs of continued progress on inflation" including "a welcome downshift of inflation in May," adding "it takes more than one data point to establish a trend."

The new president also said recent reports have suggested some softening in the U.S. economy. Data on real consumer spending and nominal retail sales that "mostly underwhelmed," he said, and the May data so far "have been mixed."

‘We're In A Flexible Position To Watch The Data And Be Patient

Federal Reserve Bank of Dallas President Lorie Logan said the U.S. central bank is in a good position with interest rates to be patient as policymakers eye incoming data on inflation, Bloomberg reported.

The latest reports on prices were welcome news, but several months of good data will be needed to instill confidence that inflation is headed back to the Fed's 2% target, Logan said Tuesday at an event in Austin.

"From a monetary policy perspective, we're in a good position, we're in a flexible position to watch the data and be patient," Logan said during a moderated question-and-answer session. "We're going to need to see several months of that data to really have confidence in our outlook that we're headed to 2%."

The Dallas Fed chief said she was still worried about upside risks to inflation despite signs the economy is coming into better balance. She also said the neutral setting for rates may be higher than it was before the COVID-19 pandemic, according to Bloomberg.

"We've just been surprised by how well the economy has just performed at these higher levels of rates, so I think that's driven questions" about the neutral rate, Logan said. "My sense is that that level is probably higher than it was in the decade before the pandemic because a lot of structural features have changed in our economy."

“Hopefully We’ll See More Like That

Chicago Federal Reserve Bank President Austan Goolsbee on Tuesday called the most recent consumer price inflation reading “excellent,” and said he sees the potential for more inflation cooling this year, Marketscreener reported, citing Reuters.

“It was an excellent inflation number after a few months of less excellent numbers so hopefully we’ll see more like that,” Goolsbee said at an event at the University of Chicago, of last week’s consumer price index reading that showed no rise in inflation from April to May.

Progress had stalled earlier this year, after falling rapidly last year. “The question is kind of, well, how much of that magic extends over into ’24 … I think there is still a little bit of the juice left that’s working its way through.”

Read Now: EXCLUSIVE: Federal Reserve To Hold Interest Rates Steady Wednesday? Here’s How Investors Are Bracing For The Results

Photo: Shutterstock

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Posted In: Top StoriesEconomicsFederal Reserveadriana kuglerAlberto MusalemAustan GoolsbeeFederal ReserveInflationInterest RatesLorie LoganStories That MatterSusan CollinsThomas Barkin
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