A prominent Federal Reserve official on Tuesday made the case for systematically cutting interest rates sometime this year as the economy comes into balance and inflation cools – although he acknowledged that the timing of those cuts is uncertain.
Christopher Waller, one of the Fed's seven Washington-based officials and one of 12 policymakers allowed to vote at its meetings, said during a speech at the Brookings Institution on Tuesday that he sees a case for a rate cut in 2024.
“The data we have received in recent months allows the committee to consider cutting the key interest rate in 2024,” Waller said. While he noted that the risk of higher inflation remains, he said: “I am more confident that the economy can continue on its current trajectory.”
Mr. Waller suggested that the Fed should lower interest rates as inflation falls. Since interest rates do not take price changes into account, the so-called inflation-adjusted real interest rates would otherwise rise as inflation falls, putting increasing strain on the economy.
“The healthy economic situation provides the flexibility to reduce the key interest rate in order to keep the real key interest rate at an appropriate level of tightening,” Waller said in his speech.
The Fed governor added that if the key interest rate is cut, it “can and should be cut methodically and carefully.”
U.S. central bankers are considering their next policy moves after two years of battling high inflation. Officials increased borrowing costs from near zero in March 2022 to a range of 5.25 percent to 5.5 percent starting this summer. But now inflation is steadily easing and central bankers are starting to think about when and how much they can cut interest rates.
While officials want to ensure they fully curb rapid inflation, they also want to avoid putting higher borrowing costs on the economy so much that they cause a painful recession.
Investors began assessing a good chance of rate cuts as early as March, although some economists have warned – and officials have suggested – that they may view an impending move as too certain.
“March, in my view, is probably too early for a rate decline,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said in a recent interview with Bloomberg Television.
When Mr Waller was asked on Tuesday whether he would rather wait too long than cut so quickly, he said: “If it's now six weeks later, on the whole it's hard to believe it's going to work.” have an enormous impact on the economic situation.”
Mr. Waller said that while his assessment of the policy outlook was “consistent” with the Fed's December forecast that it would cut rates three times this year, “the timing of the rate cuts and the actual number of rate cuts will be in 2024 will depend on the upcoming interest rate cuts.” data.”
He said the timing of the first rate cut would be at the discretion of the Fed's monetary policy committee.
Officials want to see evidence that progress continues, he said, “and I believe it will, but we need to see that before we start making decisions,” he said.
Mr Waller indicated he would be keeping a particularly close eye on revisions to inflation data due to be released in early February.
“My hope is that the revisions confirm the progress we have seen, but good policy is based on data, not hope,” he said.