Federal Reserve Governor Lisa Cook recently stated that inflation has decreased at a faster rate than anticipated. However, central bank officials are hesitant to reduce interest rates until they are more certain that price pressures are returning to pre-pandemic norms.
Waiting for Strong Assurance in Combatting Inflation
Cook, along with several other Fed officials, emphasized that the fight against inflation is not yet over. While the possibility of rate cuts lingers, they believe it is crucial to wait until victory over inflation is nearly certain.
“I would like to have greater confidence that inflation is converging to 2% before beginning to cut the policy rate,” stated Cook during a speech at Princeton University in New Jersey.
Prioritizing Stabilizing Economic Growth
In response to significant economic growth, the Fed raised a key short-term U.S. interest rate to a 23-year high from spring 2022 to summer 2023. This action aimed to mitigate the impact of soaring inflation, recorded at its highest level in four decades.
Despite keeping interest rates steady since last summer due to declining inflation rates, senior officials are cautious and seek further evidence of inflation decrease before considering interest rate reductions. This move could provide relief to homebuyers and other borrowers burdened by high rates.
Tracking Inflation Trends
The rate of inflation, as calculated by the Fed’s preferred PCE price index, decelerated to a 12-month rate of 2.6% in January from approximately 7% in mid-2022. Although this marks a decline, it remains above the Fed’s long-term goal of 2%.
Economic Outlook: A Closer Look
“Inflation has fallen more quickly than anticipated, and the risk of persistently high inflation, though it has not disappeared, appears to have diminished,” Cook noted.
Slow Progress in January
Yet the most recent data showed somewhat sticky inflation in January, Cook warned the road to 2% inflation could be “bumpy and uneven.”
Patient Approach
Fed officials have signaled that rate cuts would likely wait until the spring or early summer so they have time to see where the economy and inflation are headed. Cook also didn’t appear to be in any hurry.
A Shift in Policy Rate
“At some point, as we gain greater confidence that disinflation is ongoing and sustainable, that changing outlook will warrant a change in the policy rate.”
Upholding Current Rates
The surprising strength of the economy has given Fed officials the leeway to leave rates at current levels for the time being. Wall Street SPX investors have also pushed out their forecasts for the first rate cut.
Potential Risks
Still, some economists warn the odds of recession could grow the longer rates stay high. The housing market has borne the brunt of higher rates and manufacturers have suffered as well. Cook said she was also worried about the possible damage to the economy if the Fed keeps rates high, but she suggested the risks of a big blowback appeared low.
