Fed Officials Stress Data's Role in Setting Rate Cut Pace

It should be clear by now that the Federal Reserve has decided to stop hiking rates aggressively, while keeping rates unchanged at 5.25%-5.5% in their first meeting of the year.

 

Incoming economic data will be crucial to determining the pace at which Fed will be cutting interest rates – with three Fed officials suggesting that the path to lower borrowing costs may differ than in previous rate-cutting cycles.

Both Boston Fed President Collins and New York’s Williams have stated that the Fed’s first rate cut is most likely to be appropriate later in the year, with Atlanta’s Raphael Bostic pencilling in a cut sometime around summer.

In simple words, a cut is coming, but the timeline is yet to be confirmed.

“It’s going to be calendar based, and not be on a specific fixed schedule, but focused on the data”, stated Williams.

While Fed officials might not see eye to eye on when the cut will happen, one thing’s for sure: they all agree that inflation is a major catalyst, combined with overall economic conditions.

More specifically, policymakers have repeatedly said they want to see more evidence that inflation is firmly on a downward path before going ahead with cutting rates. The hotter-than-expected consumer price figures released earlier this month also come at play.

“We always say we will be data dependent”, Bostic said Wednesday. 

He also added that the data will be guiding the Fed on how much/how fast/when they should actually move their policy.

From a consumer’s perspective, spending has continued despite higher borrowing costs.

Moreover, the unemployment rate remains anchored at a historically low of 3.7%.

That’s essentially identical to the situation when the central bank started increasing rates in March 2022.

The central bank’s goal is to reach a 2% target when it comes to inflation. However, several policymakers do expect for the path to be bumpy from month-to-month.

Officials will be gaining fresh insight into inflation on Thursday with the release of the Fed’s preferred price indicator.

Learn more about inflation here.

“I still see signs that suggest that this is not going to be a fast march to 2%,” Bostic said. “As long as we are going to get there, and we are not seeing bad things happen on the side I am comfortable being patient.”

Key dates to keep an eye on: The upcoming Federal Reserve’s meeting is taking place on March 19-20, with market sentiment forecasting that the benchmark lending rate will stay in a range of 5.25% to 5.5%.

Futures markets have priced in a probable rate cut in June, with almost zero chance of any reduction next month.