A prominent Federal Reserve official on Tuesday made a case for methodically lowering interest rates at some point this year as the economy returns to balance and inflation subsides – although he acknowledged that the timing of these reductions remained uncertain.
Christopher Waller, one of seven Washington-based Fed officials and one of 12 policymakers who can vote at its meetings, said Tuesday in a speech at the Brookings Institution that he sees arguments in in favor of a reduction in interest rates in 2024.
“The data we have received in recent months allows the committee to consider a reduction in the policy rate in 2024,” Waller said. While noting that risks of higher inflation remain, he said: “I am more confident in the economy’s ability to continue on its current trajectory.”
Mr. Waller suggested that the Fed should lower interest rates as inflation falls. Since interest rates do not take into account price changes, so-called real rates, adjusted for inflation, would rise as inflation fell, thus weighing more and more heavily on the economy.
“The healthy state of the economy provides the flexibility to lower” the policy rate “to keep the real policy rate at an appropriate tightening level,” Waller said in his speech.
The Fed governor added that when the policy rate is cut, “it can and should be lowered in a methodical and prudent manner.”
U.S. central banks are considering their next policy moves after two years of battling high inflation. The authorities increased borrowing costs from near zero in March 2022 to a range of 5.25% to 5.5% starting this summer. But today, inflation is steadily fading and central bankers are starting to think about when and how much to cut rates.
While officials want to ensure they completely stamp out rapid inflation, they also want to avoid squeezing the economy to the point of causing a painful recession with higher borrowing costs.
Investors began to consider a good chance of rate cuts As early as March, even though some economists warned — and officials suggested — that they perhaps viewed an imminent decision as too safe a bet.
“March is probably too early in my estimate for a rate cut,” said Loretta Mester, president of the Federal Reserve Bank of Cleveland. said in a recent interview with Bloomberg Television.
When Mr. Waller was asked Tuesday whether he would rather wait too long than cut so soon, he said that “overall, whether it’s six weeks later, it’s hard to believe that it’s going to have a huge impact on the state of the economy.
Mr. Waller said that while his view on the policy outlook was “consistent” with the Fed’s December projection that it would cut interest rates three times this year, “the timing of the cuts and the The actual number of reductions in 2024 will depend on the evolution of interest rates. data.”
He added that the timing of the first rate cut would depend on the Fed’s steering committee.
Officials want to see proof that progress is continuing, he said, “and I believe it will, but we need to see it before we start making decisions,” he said.
Mr Waller suggested he would keep a particularly close eye on revisions to inflation data due to be released in early February.
“I hope the analyzes will confirm the progress we have seen, but good policy is based on data, not hope,” he said.