Federal Reserve officials signaled a cautious approach to lowering interest rates, with three prominent voices advocating for gradual, modest adjustments to give the economy room to breathe.
Jeff Schmid, president of the Kansas City Fed, pushed for a “cautious and gradual” path, emphasizing the need for a steady hand.
He pointed out that smaller rate changes would allow policymakers to monitor how the economy responds, reducing the risk of market shocks.
Schmid noted, “Lowering rates in a gradual fashion would provide time to observe the economy’s reaction to our interest rate adjustments and give us the space to assess at what level interest rates are neither restricting nor boosting the economy.”
Minneapolis Fed president Neel Kashkari echoed the sentiment, predicting “modest cuts over the next quarters.”
Meanwhile, Lorie Logan of the Dallas Fed reiterated her view that the path forward should be slow and steady, citing concerns that the job market could soften and inflation may still resurface.
“If the economy evolves as I currently expect, a strategy of gradually lowering the policy rate toward a more normal or neutral level can help manage the risks and achieve our goals,” Logan said during a speech at the Securities Industry and Financial Markets Association in New York.
She underscored the importance of patience, especially given the uncertainties still looming over the labor market and inflation.
Last month, the Fed lowered rates for the first time in over four years, and with another meeting on the horizon, traders are betting on a 25 basis point reduction.
However, Fed officials seem united in preferring a deliberate pace, aiming to avoid any drastic shifts that could jolt financial markets.
Logan remains cautious despite recent job gains, warning of underlying risks.
Inflation has cooled following the Fed’s efforts to bring prices under control, but concerns linger, particularly after the Consumer Price Index showed stronger-than-expected numbers in September.
The Fed is now awaiting the next reading of the Personal Consumption Expenditures (PCE) index and another jobs report to better understand the economy’s direction.
Schmid believes rates could eventually settle “well above” pre-pandemic levels, adding that the Fed’s careful strategy minimizes market volatility.
With uncertainties still swirling, the Fed’s course remains flexible. “The FOMC will need to remain nimble and willing to adjust if appropriate,” Logan said.
In the business world, such caution from the Fed is critical as it shapes corporate strategies and investment decisions.
Schmid also emphasized that a measured approach minimizes the Fed’s contribution to financial market instability while ensuring interest rates don’t overly restrict or stimulate economic growth.
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