MNI FED WATCH: Rate Cuts On Pause But FOMC Keeps Easing Bias
MNI (WASHINGTON) - The Federal Reserve is set to keep interest rates on hold Wednesday after delivering 100 basis points of cuts at the end of 2024, shifting to a more cautious stance as it awaits further signs that disinflation will continue.
Upside risks to inflation have risen while continued strength in U.S. economic activity and the labor market allow officials to be patient in deciding when to take another step toward neutral. The federal funds rate is currently trading in a 4.25%-4.5% range.
The FOMC is also treading cautiously in light of heightened uncertainty over potential changes in trade, immigration, fiscal and regulatory policies under the newly inaugurated President Donald Trump and Republican-led Congress. The president has already said he intends to demand that interest rates "drop immediately."
Former Atlanta Fed President Dennis Lockhart told MNI the Fed could wait until midyear or later to reduce rates again. Traders have priced in a first cut for the year in June.
"No cut in January is a foregone conclusion. March represents a chance to evaluate any policies announced by the Trump administration, but it will be still early to draw any conclusions as to the effect of new policies, so I’m inclined to believe they’ll skip that meeting as well," Lockhart said in an interview. (See MNI INTERVIEW: Lockhart Sees Fed On Hold 'Til At Least Midyear)
BALANCE OF RISKS
Already, a significant minority on the FOMC wanted to pause rate cuts in December as measures of underlying inflation pressures appeared to be stuck at around 2.5% in the second half.
Former St. Louis Fed economist David Andolfatto told MNI inflation could hover between 2.5% and 3% for the foreseeable future, in part because rising deficits are likely to maintain upward pressure on prices, with tariffs and immigration restrictions adding to those risks.
Concern over unsustainable government borrowing has lifted the 10-year Treasury yield nearly a percentage point since the Fed started cutting rates. A sustained rise in Treasury yields could pose the biggest risk to the U.S. labor market, which is cooling gradually and entered a healthy equilibrium last year. The unemployment rate has stayed low at 4.1% and job creation solid.
Though Andolfatto and others warn the possibility of a rate hike as the next move should not be ruled out, the core of the committee still appears keen to cut rates, even if they will require convincing improvement in the inflation outlook to do so, former Kansas City Fed President Esther George told MNI.
The fed funds rate remains more than 100 bps above the median FOMC member's estimate of its longer run or neutral position.