The Federal Reserve’s timing for interest rate cuts this year has drawn significant attention from the market. Raphael Bostic, the President of the Federal Reserve Bank of Atlanta, stated on Thursday that he still expects the Federal Reserve to initiate interest rate cuts in the third quarter. He warned against early rate cuts as it could lead to a surge in demand and subsequently trigger inflation.
Background:
The “Dove King” of the Federal Reserve predicts two interest rate cuts in 2024, with action from the Fed in the third quarter.
After three consecutive pauses in rate hikes, the Federal Reserve has kept the federal benchmark interest rate unchanged in the range of 5.25% to 5.50%. The market’s most optimistic expectation was that the Fed would initiate rate cuts in March. However, data released last week showed that the December Consumer Price Index (CPI) increased by 3.4% year-on-year, exceeding market expectations and reducing the possibility of rate cuts in March.
In light of this, Raphael Bostic, who has always held a dovish stance, called for caution in implementing rate cuts. He cited various unpredictable events, such as domestic elections and global conflicts, that could potentially impact the economy.
Openness to early rate cuts:
Bostic, who has voting rights on monetary policy this year, expressed his hope to see more signs of inflation returning to the 2% target. Although he currently expects the Federal Reserve to begin cutting rates in the third quarter, he indicated that he would be open to earlier rate cuts if inflation decreases at a much faster pace than anticipated.
However, Bostic believes that the Federal Reserve should remain cautious given the current overall situation. Early rate cuts could lead to a surge in demand and subsequently put upward pressure on prices. He does not want to undermine the significant progress made by the Federal Reserve in achieving its inflation target.
Bostic expects the Federal Reserve’s preferred inflation indicator, the Personal Consumption Expenditures Price Index (PCE), to decline to 2.4% this year, still above the Federal Reserve’s 2% target. The PCE in November last year was 2.6%, and Bostic’s forecast is filled with uncertainties due to potential disruptions in the global supply chain caused by conflicts and risks such as the Federal budget struggle and elections in the United States.
No change in rates expected this month:
The next meeting of the Federal Open Market Committee (FOMC) will be held on January 31. According to data from the Chicago Mercantile Exchange (CME) Fed Watch, the market expects only a 2.6% probability of a 1-point rate cut by the Federal Reserve, while the probability of rates remaining unchanged is as high as 97.4%.
Furthermore, the interest rate dot plot released in December indicates that the Federal Reserve will cut rates three times in 2024, with a reduction of approximately 3 points.
Related Reports:
US December nonfarm payrolls “exceed expectations”, prompting calls for central bank rate cuts.
Bankless: ETFs, halving, rate cuts – where will Bitcoin go next?
Wall Street’s dream scenario: “Mild economic recession” in 2024 followed by rate cuts, the anti-inflation war has been won.