MNI: Fed’s Cook-Disinflation Will Warrant ‘Eventual’ Rate Cut

Declining U.S. inflation will at some point allow the Federal Reserve to begin cutting interest rates, but officials need greater confidence that price pressures are headed sustainably back to the central bank’s 2% goal, Fed Governor Lisa Cook said Thursday.

“At some point, as we gain greater confidence that disinflation is ongoing and sustainable, that changing outlook will warrant a change in the policy rate. I would see an eventual rate cut as adjusting policy to reflect a shifting balance of risks,” she said in prepared remarks to a conference at Princeton University. (See: MNI INTERVIEW: US Inflation To Linger As Fed Loosens - Warsh)

Cook said she was pleased with recent progress on inflation and that the risk of a resurgence in prices appeared to have diminished.

“The disinflationary process has been, and may continue to be, bumpy and uneven, as highlighted by last week’s reports on the consumer price index and the producer price index. But a forecast of 12-month PCE inflation converging to our 2% target over time still seems reasonable as the baseline outlook,” she said.

BETTER PLACED

Cook contrasted current conditions with those prevailing in July of last year, when the Fed took rates to their current 23-year high level of 5.25-5.5%. At the time, she said, there was a substantial risk that inflation would stay above 3% for some time.

“Since then, inflation has fallen more quickly than anticipated, and the risk of persistently high inflation, though it has not disappeared, appears to have diminished,” she said, adding that she expects housing services inflation to moderate. “I intend to closely monitor incoming data to determine whether the disinflation process is continuing.”

Cook said labor market conditions are also becoming more sustainable after a run of bumpier employment growth that followed the pandemic, adding she is cognizant of the possibility that post-pandemic efforts to strengthen supply chains could have inflationary ripples.

“Such a reduction and reorienting of trade could reverse some of the persistent decline in goods prices that was seen over the two decades preceding the pandemic,” she said.