Inflation is not stable enough to lower interest rates

It is not the right time to cut interest rates.

At the start of 2024, futures traders were predicting at least six rate cuts this year, starting in March 2024. However, a string of higher-than-expected inflation data has changed those predictions. The first expected rate cut has not happened, with the earliest cut predicted for September 2024.

Christopher Waller - Governor of the Federal Reserve Bank of St. Louis, as a permanent voting member of the Federal Open Market Committee, has shown caution and is not ready to support a rate cut at this time.

“If the labor market does not weaken significantly (the economy remains stable) and we can tolerate some level of inflation, we will see inflation data for several more months before we can comfortably ease the stance of monetary policy,” Christopher Waller told the Peterson Institute for International Economics.

Headquarters of the US Federal Reserve (FED) in Washington, DC (Photo: Reuters)

Meanwhile, Cleveland Fed President Loretta Mester reiterated her view that inflation data should be considered before making monetary policy decisions in her comments at the Atlanta Fed Conference on May 21.

“I need to see inflation data in the next few months, it looks like it is coming down,” Mester said, adding that if inflation data is coming down, it could suggest that inflationary pressures are easing and that there is no longer a need to maintain a tight monetary policy. However, monetary policy decisions are not only dependent on inflation data, but also on many other factors such as the labor market situation, economic growth prospects and financial conditions.

Christopher Waller pointed to a string of recent data, from flat retail sales to cooling in both the manufacturing and services sectors, to show that the Fed's higher interest rates have helped to dampen some of the demand that has contributed to the highest inflation rate in more than 40 years.

Despite the strong wage gains, internal data show tightness in the US labor market as more people decide to leave their jobs. The competitive labor market is keeping wages high. However, this could undermine the Fed's 2% inflation target.

In addition, the US consumer price index in April showed inflation at 3.4% year-on-year, down slightly from March. The monthly increase was 0.3%, slightly lower than economists had expected. This indicates that the pace of price increases is steadier than previously expected, although it is still high compared to the Fed's 2% inflation target.

Need to wait longer

The Labor Department report was hailed as “a welcome relief” by Christopher Waller, but he stressed that while the report was an improvement, it was not enough to change his view that more compelling evidence was needed to support any monetary easing.

Christopher Waller did not reveal his specific expectations for the timing or magnitude of a rate cut, instead saying he would keep it a secret and wait for specific developments he would like to see in future inflation reports.

In a statement, Atlanta Fed President Raphael Bostic echoed Waller’s sentiment, saying the U.S. central bank needs to be careful when deciding to cut interest rates for the first time to ensure that it does not hurt business and household spending, while also being careful not to put policymakers in a position where inflation could rise again quickly.

"It's in our interest to avoid any volatility... We need to make sure that when we do decide to proceed, inflation is stable at 2% ," Raphael Bostic told reporters on the sidelines of the Atlanta Fed conference in Florida. He said he still believes inflation will decline over the course of the year, and that a rate cut in the fourth quarter of 2024 is appropriate.

Source: https://congthuong.vn/cac-quan-chuc-fed-canh-bao-lam-phat-chua-on-dinh-de-ha-lai-suat-321683.html