Federal Reserve officials said in speeches and interviews this week that the central bank is making good progress on bringing down inflation, but most stopped short of signaling near-term interest rate cuts.
Inflation Outlook Improving, But Data Doesn’t Support Rate Cuts Yet
Several Fed presidents and governors said inflation appears to be moderating from last year’s 40-year highs. However, most said it is too soon to declare victory or predict the timing of future rate cuts.
San Francisco Fed President Mary Daly said on Thursday: “I think we’re in a really good place right now.” She added that inflation is “moving in the right direction” but there are still risks, highlighting recent wage gains. Source
Earlier in the week, Fed Governor Christopher Waller advocated taking a careful approach to interest rate cuts despite growing optimism that inflation has peaked.
“We’re certainly in striking distance of our 2% goal,” Waller said regarding inflation. However, he added: “It would be premature to conclude that it is time to halt further rate increases or begin easing policy.” Source 1, Source 2
Similarly, Atlanta Fed President Paul Goolsbee said this week it is too early to determine when rate cuts could begin this year. He expects “additional evidence” is needed to show inflation is on a “sustained downward path” before policy changes. Source
On Friday, Fed Vice Chair Lael Brainard echoed her colleagues in saying more time is needed to be confident that inflation is “moving down in a sustained way.” Source
Waller: 3 Rate Cuts Possible This Year if Inflation Falls
Despite advocating a gradual approach, Governor Waller did map out a path to interest rate cuts starting later this year if inflation continues improving.
“If the data comes in exactly as I expect, I could support three 25 basis-point rate cuts this year,” Waller said. This would bring the federal funds rate to a range of 3.75-4% by the end of 2024. Source
Such a path is contingent on monthly inflation through August coming in at 0.1%, and no increase in longer-run inflation expectations, Waller noted.
|Core PCE Inflation
Table 1: Christopher Waller’s expected monthly core PCE inflation for potential rate cuts this year. Source: Barron’s
If inflation does not cooperate, Waller said hikes could resume. But he sees a “recession this year as unlikely given the strength we continue to see in the economy.” Source
Mortgages Could Drop to Around 5% by Year-End
Lower Fed rates later this year would support a continued decline in mortgage rates, which climbed above 7% last fall but have since retreated.
Economists surveyed by CBS News estimate 30-year fixed mortgage rates could fall to a range of 4.5% to 5.5% by the end of 2024. This would boost housing affordability from recent decades-long lows.
“If inflation keeps coming down, then mortgage rates will just keep coming down as well,” said Lawrence Yun, chief economist at the National Association of Realtors.
However, sustained high inflation or an escalation in the war in Ukraine could send Treasury yields and mortgage rates back up, economists cautioned. Source
Falling mortgage rates through the year would be supported by Waller’s expected “careful” rate cuts from the Fed as inflation pressures continue easing. Homebuyers and the housing market would likely welcome the increased affordability after the rapid surge in rates last year.
Wall Street Pares Bets on March Cut After Fed Comments
U.S. stocks declined and Treasury yields rose on Tuesday following Waller’s remarks about not rushing into rate cuts.
Wall Street analysts said the comments led traders to temper expectations for a rate cut at the Fed’s March policy meeting. Interest rate futures now show just a 17% chance of a 25 basis-point cut next month, down from about 50% odds last week, according to CME Group data.
“Waller was pretty plainly intending to lean against the easing speculation,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., now sees the Fed holding rates steady through June before cuts start in the second half of the year. “We don’t have liftoff for cuts until later,” he noted. Sources: 2
So while Fed officials this week expressed growing optimism around inflation falling, policymakers downplayed expectations of rate cuts in the first half of 2024. Markets will be closely monitoring upcoming inflation data for signs confirming the downward trajectory. If price measures continue moderating in line with forecasts, rate cuts could begin in the second half – delivering some welcome relief for homeowners and the overall economy.
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