On Monday, four officials from the Federal Reserve expressed their views on future interest rate cuts. Three of them leaned towards a “cautious and gradual” approach, but Mary Daly, the President of the Federal Reserve Bank of San Francisco and the only one with voting rights this year, stated that the current interest rates are too “restrictive,” suggesting that the pace of rate cuts should be accelerated.
Background:
Fed’s Kashkari: Bitcoin Has No Use after Over 10 Years, Further Mild Rate Cuts in the Coming Quarters
September CPI in the US “Higher than Expected,” Concerns Raised about Inflation Stagnation! Fed Officials: Rate Cut in November Not Definite
Contents:
Federal Reserve’s Daly: No Reason Not to Continue Rate Cuts, Current Rates are “Too Restrictive”
Federal Reserve’s Schmid: Cryptocurrencies are Risk Assets, Not Currency
Federal Reserve’s Kashkari: Mild Rate Cuts in the Coming Quarters
Probability of Rate Cut in November
The September Consumer Price Index (CPI) announced in the US this month
Year-on-year increase of 2.4%, higher than market expectations, causing concerns in the market about stagnation in inflation progress and affecting the pace of future rate cuts by the Fed.
The minutes of the September FOMC monetary policy meeting, released earlier, also showed divergent views among Federal Reserve officials on economic prospects and the magnitude of rate cuts. Raphael Bostic, the President of the Federal Reserve Bank of Atlanta, stated in mid-October that based on the latest CPI report, he personally might lean towards pausing rate cuts at the November meeting. However, several other Fed officials were not concerned about the higher-than-expected September inflation data, suggesting that the Fed could continue to cut rates.
Notably, according to a Reuters report, the four Federal Reserve officials expressed their views on rate cut strategies on Monday, with all four indicating support for further rate cuts. However, they had different opinions on the speed and magnitude of rate cuts. Three of them cited strong economic growth and uncertain prospects as reasons for favoring “slow rate cuts.” Mary Daly, the President of the Federal Reserve Bank of San Francisco and the only one with voting rights at this year’s FOMC meetings, advocated for continued rate cuts and believed that the current monetary policy is “very tight,” stating that she voted in favor of a significant 0.2% rate cut in September.
Jeffrey Schmid, the President of the Federal Reserve Bank of Kansas City, expressed in a speech on Monday that considering inflation returning to the Fed’s 2% target and normalization of the labor market, he supported a “cautious and gradual” approach to rate cuts instead of a radical one. Schmid also stated that future interest rates may stabilize at levels much higher than before the COVID-19 pandemic. He believed that a significant rate cut by the Fed could increase the risk of financial market volatility and that a “cautious and gradual” rate cut strategy is most suitable for this uncertain economic environment. Additionally, he added his view on cryptocurrencies, stating that “cryptocurrencies are risk assets, a playground, rather than a currency.”
Neel Kashkari, the President of the Federal Reserve Bank of Minneapolis, who also advocates for slowing down the pace of rate cuts, reiterated on Monday that the Fed should make “moderate” rate cuts in the coming quarters. He said, “Currently, I predict a more moderate reduction in the next few quarters to reach a neutral level, but this will depend on the data.” However, if he sees a drastic deterioration in the labor market data, it may prompt him to advocate for accelerating rate cuts. He also stated that the strong performance of the economy suggests that the terminal rate (the so-called neutral rate) of this policy rate cycle may be higher than in the past, which aligns with Schmid’s view.
Furthermore, Lorie Logan, the President of the Federal Reserve Bank of Dallas, also supports a cautious approach to rate cuts in the face of an uncertain economy. She stated, “If the economy develops as I currently expect, gradually reducing policy rates to a more normal or neutral level can help manage risks and achieve our goals.”
With the views of three officials on the need for “cautious and gradual” rate cuts, the latest data from the CME Group’s FedWatch tool shows that the market currently believes the probability of maintaining the current rate of 4.75% to 5% in November is 11%, while the probability of a 0.25% rate cut to 4.5% to 4.75% is 89%. Most people are still betting that the Fed will continue to cut rates.
The next FOMC meeting of the Federal Reserve will be held on November 7th, which is highly anticipated by the market as the first rate decision meeting after the US presidential election.