Fed Officials Provide Support for 50-Basis Point Cut — Evening Brief – 09.23.24 

Even after the Federal Open Market Committee (FOMC) reduced its benchmark policy rate by half a percentage point, “the overall stance of monetary policy remains tight,” Minneapolis Fed President Neel Kashkari wrote in an essay published Monday. The larger-than-usual cut was justified by the progress made in inflation, paired with the softening labor market. 

“While there remain mixed signals about the underlying strength of the U.S. economy and I remain uncertain just how tight policy is, I do believe policy remains tight today,” he said. 

Kashkari raised his estimate for the longer-term federal funds rate in the Federal Reserve’s Summary of Economic Projections, citing the economy’s resilience in the face of an elevated policy rate. “A combination that suggests the neutral rate may have climbed at least temporarily,” he said. The neutral rate is the point at which the Federal Reserve’s rate neither stimulates nor inhibits economic growth. 

“The longer this economic resilience continues, the more signal I take that the temporary elevation of the neutral rate might in fact be more structural,” he added. 

The essay included a chart outlining Kashkari’s annual estimates. He forecasts a federal funds rate of 4.4% by the end of the year, with the rate falling further to 3.4% by the end of 2025 and 2.9% by the end of 2026.   

Kashkari, a non-voting member of the FOMC, was previously perceived as one of the more hawkish policymakers. In August, he had expressed his willingness to consider a rate cut, but he had also stated that he would favor a smaller reduction unless the labor market experienced a rapid decline. 

Bostic Notes Softer Labor Market 

Meanwhile, Atlanta Fed President Raphael Bostic said on Monday that he did not push to lower interest rates further than the 50-basis point cut implemented last week because there is still some uncertainty about the central bank’s ability to “really be confident that both our inflation and employment goals are fully within reach.” 

“The path of inflation in 2024 has been choppy, and the unpredictable nature of rents and housing prices still worries me. I will not be comfortable claiming victory if we stall short of our inflation goal, even if virtually all non-housing PCE component prices are increasing at their pre-pandemic rates,” he said in prepared text for a speech delivered virtually at the European Economics and Financial Centre. 

Disinflation slowed early in 2024, then increased in the spring and summer. Nonetheless, the economy advanced more quickly than Bostic anticipated. “Progress on inflation and the cooling of the labor market have emerged much more quickly than I imagined at the beginning of the summer,” he said. “In this moment, I envision normalizing monetary policy sooner than I thought would be appropriate even a few months ago.”  

The rate drop indicates a shift in risks to the Fed’s two mandates of full employment and price stability. Inflation has made significant progress toward the central bank’s target, while the labor market has weakened. 

“The most recent data solidify my conviction that the U.S. economy is indeed sustainably on the path back to price stability,” Bostic said. He is not only observing it in the CPI and PCE, but he is also hearing it from the business contacts of the Atlanta Fed. “In virtually every industry and sector of the economy, business leaders tell me their pricing power has all but evaporated.” 

With the housing market still a concern, a 25-basis point cut may have been warranted. “But such a move would belie growing uncertainty about the trajectory of the labor market that I have already noted,” Bostic said. 

He also stressed that while the labor market has softened, it’s not yet flashing red. “I want to be clear that I do not believe that labor markets have dangerously weakened. That is not what the data show, nor what business leaders tell us,” he said. 

Any more material weakening in the labor market over the next month or so will cause him to change his view on “how aggressive policy adjustment needs to be.” The larger-than-usual rate cut, though, “does not lock in a cadence for further moves” he concluded. 

Goolsbee Sees “Many More” Cuts 

Austan Goolsbee, president of the Chicago Fed, anticipates that there will be “many more” interest rate cuts in the coming year, as inflation has decreased significantly from its peak and the labor market is essentially at full employment. 

“Basically, we would love to freeze both sides of the Fed’s dual mandate right here,” Goolsbee said in remarks prepared for delivery to the National Association of State Treasurers Annual Conference. “Yet, rates are the highest they’ve been in decades. It makes sense to hold rates like this when you want to cool the economy, not when you want things to stay where they are.” 

Goolsbee said he supported the 50-basis-point rate cut last week. “If we want a soft landing, we can’t be behind the curve,” he said.   

The Federal Open Market Committee’s Summary of Economic Projections, updated last week, indicated that they are leaning toward another 50 basis points of rate cuts by the end of the year.