2024-01-14 17:17:24
A Federal Reserve official expects the pace of decline in US inflation to slow… and warns against rushing to cut interest rates
Rafael Bostic, Chairman of the Federal Reserve in Atlanta, said that US inflation may rise again if monetary policy makers rush to lower interest rates prematurely, and at the same time he expected the pace of US inflation to decline to its target level, estimated at two percent, to slow in the coming months.
After rising to its highest level in decades during the summer of 2022, exceeding 9%, US inflation declined sharply during the second half of last year, paving the way for monetary policy makers to consider reducing borrowing costs from their highest level in 23 years, which is currently stable. In the range of 5.25% to 5.5%.
Bostic, who will vote on FOMC decisions this year, said he “expects to see much slower progress in inflation moving forward,” noting that there is “some risk that inflation may completely stop declining.”
Bostic’s comments came before the December CPI reading, which showed headline inflation rising to 3.4% from 3.1% in November.
While Bostic acknowledged that price pressures have declined faster than he expected last year, he still expects inflation to reach around 2.5% by the end of 2024. “Inflation will not reach the Fed’s target until 2025,” he added.
Bostic said, after Fed members voted in December, that he believed interest rates would need to remain unchanged beyond the summer. He told the Financial Times that the uncertainty facing the American economy requires such a cautious approach. He stressed: “Inflation must return strongly and steadily to our target of 2%. It will be a bad result if we start reducing interest rates, and inflation begins to rise up and down like a seesaw. This would undermine people’s confidence in the future vision of the economy.”
Shortly before the middle of last December, the US Federal Reserve decided to fix the interest rate on its funds at a range of 5.25% – 5.50%, sending a message of reassurance to investors and American citizens in the last meetings of the year. Many considered it an indication that the world’s largest central bank’s war on inflation was close to reaping results. The fruits.
According to what was announced at the time, most officials expected three interest rate cuts in 2024.
Despite the increasing expectations of monetary policy makers for a decline in price pressures and their return to pre-pandemic levels, most members of the Federal Open Market Committee are still reluctant to shift from the hawkish stance that shaped their vision during the recent period.
But developments in the movement of stocks and bonds in the American market confirmed that investors were more hasty, as the futures markets held six cuts, each by a quarter of a percentage point, in 2024, with the first of them occurring in March. This compares to interest rate setters expecting three cuts, while Bostic sees only two.
“The markets are hearing what we are saying, and our expectations for lower interest rates have been very clear, but I feel that they believe inflation will fall faster than I expect,” the head of the Atlanta Fed said.
Bostic warned that the recent rise in shipping costs, against the backdrop of traffic disruption in the Suez Canal, should be monitored “closely.” The cost of shipping a 40-foot container from the Far East to Europe has risen by nearly 150% over the past month, according to data from logistics research company Zenita.
“It will be very interesting to see to what extent the conflict in the Middle East and attacks on container ships begin to feature in the cost structure of companies in my region,” he said.
Bostic believes that with the unemployment rate at just 3.7%, the labor market remains too strong for the Fed to shift its focus from inflation to job creation.
However, the labor market is no longer as hot as it used to be, with job creation largely limited to the healthcare and government sectors. “There are signs under the hood that some sectors of the economy have weakened,” Bostic said.
The head of the Federal Reserve in Atlanta said he was taking a closer look at liquidity conditions, after some board members said the Federal Reserve may soon need to slow down the process of reducing its balance sheet.
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