A top Federal Reserve official on Tuesday made the case for methodically lowering interest rates at some point this year, when the economy returns to balance and inflation cools, even as he acknowledged that the timing of such cuts remain uncertain.
Christopher Waller, one of seven Washington-based Fed officials and one of 12 politicians who have voting rights at its meetings, said during a speech at the Brookings Institution on Tuesday that he saw an opportunity to cut interest rates in 2024 .
“The data we have received in recent months allows the committee to consider a policy rate cut in 2024,” Waller said. While stressing that risks of rising inflation remain, he said: “I feel more confident that the economy can continue along its current trajectory.”
Waller suggested the Fed should lower interest rates as inflation falls. Because interest rates do not incorporate price changes, so-called inflation-adjusted real rates would otherwise rise as inflation falls, thus burdening the economy more and more heavily.
“The health of the economy provides the flexibility to lower” the policy rate “to keep the real policy rate at an appropriate level of tightness,” Waller said in his speech.
The Fed governor added that when the policy rate is cut, “it can and should be lowered methodically and carefully.”
American central bankers are pondering next policy steps after two years of battling high inflation. Officials raised borrowing costs from near zero in March 2022 to a range of 5.25% to 5.5% starting this summer. But now inflation is steadily declining and central bankers are starting to think about when and how much to lower rates.
While officials want to ensure they completely eliminate rapid inflation, they also want to avoid squeezing the economy so much with higher borrowing costs that it causes a painful recession.
Investors began anticipating a good chance of rate cuts as early as March, although some economists have warned – and officials have hinted – that they may view an imminent move as too safe a bet.
“March is probably too early for a rate drop in my opinion,” 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 soon, he said that “in the grand scheme of things, whether it’s been six weeks, it’s a little hard to believe that it’s going to have a huge impact on the state of the economy”.
Waller said that while his view of the policy outlook was “consistent” with the Fed’s December projection that it would cut interest rates three times this year, “the timing of the cuts and the actual number of cuts in 2024 they will depend on the next cuts.” data.”
He said the timing of the first rate cut would be up to the Fed’s policy-setting committee.
Officials want to see evidence that progress continues, he said, “and I believe it will, but we need to see it before we start making decisions,” he said.
Waller suggested keeping a close eye on revisions to inflation data due in early February.
“My hope is that the reviews confirm the progress we have seen, but good policy is based on data and not hope,” he said.