The Federal Reserve is sending mixed signals about potential interest rate cuts later this year. Top officials indicate rates are likely to fall, but stress policymakers must wait for clear evidence inflation is defeated before easing monetary conditions. Markets dropped on remarks urging patience.
Fed Governor Predicts Cuts If Inflation Keeps Slowing
In a speech Monday, Fed Governor Christopher Waller said additional interest rate cuts could come this year if inflation data continues trending lower towards the central bank’s 2% target. However, he cautioned officials must be careful not to act prematurely. 
“We are within striking distance of our 2% goal, but we are not there yet, so premature rate cuts risk unraveling the progress we have made on inflation,” said Waller.
Waller anticipates “around three cuts of 25bps each” in 2024 if upcoming Consumer Price Index (CPI) revisions show persistently slowing price growth. 
Top Officials Echo Caution Over Quick Cuts
Since Waller’s remarks, other Fed leaders have similarly preached patience on rate reductions while forecasting cuts on the horizon.
San Francisco Fed President Mary Daly said Tuesday it is “too early” and “premature” to be certain cuts are imminent.   She wants to avoid “policy mistakes” and says recent data does not clearly indicate it is time to ease.
Chicago Fed President Austan Goolsbee also stressed Wednesday officials should not read too much into any one policymaker’s rate cut opinions. 
“It would be a mistake for markets to hinge policy expectations on the particular words of any given Fed official at any given time,” said Goolsbee.
|Rate Cut Stance
|Open to cuts later this year if inflation keeps slowing
|Too early to forecast cuts; wants more data
|Avoid overanalyzing officials’ rate opinions
This chorus of prudence from governors comes despite growing market expectations of cuts this year. Traders are betting on six rate decreases in 2024 as part of a “recession insurance” plan. 
Markets Drop On Remarks Urging Patience
Waller’s hesitancy over quick cuts sparked a stock market decline Monday. The Dow Jones shed over 200 points amid fears higher rates could persist for longer than hoped. 
Meanwhile, his comments lifted Treasury yields and strengthened the dollar as forex markets priced out some expected Fed easing.   
“The reaction in markets is showing folks don’t want to hear about patience right now,” said Seema Shah, chief strategist at Principal Global Investors.
Inflation Trending Down But Still Above Target
Consumer inflation dropped from a 40-year high of 9.1% in June to 6.5% in December. But prices are not falling fast enough for some Fed policymakers.
“Recent data show inflation is heading in the right direction,” Waller noted. “But we need clear and convincing evidence that inflation is converging back down to our 2% goal before easing policy.”
For now, the Fed seems intent on avoiding past mistakes of premature policy pivots. Officials want inflation fully defeated to guard against any reversal in recent disinflation progress.
“We will have to retain restraint until we are firmly convinced that inflationary pressures are abating and inflation expectations are well anchored,” said Atlanta Fed President Raphael Bostic last week. 
Recession Fears May Force Fed’s Hand
While most officials oppose quick cuts, a weakening economy may force a policy shift sooner than they hope.
Many economists predict a recession this year which could rapidly darken the Fed’s outlook. Research consultancy Capital Economics sees GDP contracting as much as 2% peak-to-trough. 
With rapidly rising layoffs already underway, any economic downdraft will likely spur urgent calls for Fed relief.  
“If we get a recession and very high unemployment, the Fed will have no choice but to slash interest rates,” said economist Elliot Mills. “At that stage, overshoot on inflation becomes a secondary concern.”
The Winding Road Ahead
For now, the Fed appears set to leave rates elevated through mid-2024 unless economic cracks emerge. But further disinflation progress will likely bring easing back onto the agenda.
Much depends on upcoming CPI updates. The January data lands on February 15 and could be pivotal in reshaping rate cut opinions. For markets, uncertainty looms over how patient the Fed can truly remain as risks build.
“Volatility is poised to make an unwelcome return,” said Michael Schumacher of Wells Fargo. “Monetary policy is entering a grey zone with conflicting signals from the data and Fed speakers.”
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