Fed officials still expect a rate cut this year, but not anytime soon

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Cleveland Federal Reserve Chair Loretta Mester said Tuesday she still expects to cut interest rates this year, but ruled out holding off on the next policy meeting in May.

Mester also indicated that the long-term path is higher than policymakers previously thought. His fellow policymaker, San Francisco Fed President Mary Daly, also said Tuesday she expected to cut again this year, but not until there was strong evidence that inflation had subsided.

The central bank official said progress has been made on inflation while the economy continues to grow. Should that continue, a rate cut is likely, though he gave no guidance on timing or extent.

“I think the most likely scenario is that inflation will continue downward to 2 percent over time. But I need to see more data to increase my confidence,” Meester said in prepared remarks for a speech in Cleveland. Is.”

Additional inflation readings will provide an indication of whether some of the higher-than-expected data points this year were either a temporary decline or a sign that progress on inflation is “stalling,” he said.

“I don’t expect I will have enough information to make this decision until the next FOMC meeting,” Mester said.

The comments come nearly two weeks after the rate-setting Federal Open Market Committee voted again to keep its key overnight lending rate between 5.25%-5.5%, where it has stood since July 2023. Meister’s comments were echoed in a statement after the meeting. The committee needs to see further evidence that inflation is moving toward the 2% target before it starts lowering rates.

Mester’s comments appear to rule out a cut at the April 30-May 1 FOMC meeting, a sentiment also reflected in market pricing. Mester is a voting member of the FOMC, but will leave in June after completing his 10-year term.

Futures traders expect the Fed to begin easing in June and cut rates by three-quarters of a percent by the end of the year.

San Francisco Fed President Daley said three cuts this year is a “very reasonable baseline,” though he added that nothing is guaranteed. Daly is also a FOMC voter this year.

“Three rate cuts are a projection, and a projection is not a promise,” he said, later adding, “We’re getting there, but it won’t be tomorrow, but it won’t last forever.”

In looking for a rate cut, Mester said he thinks the long-term federal funds rate will be higher than the long-term expectation of 2.5%. Instead, she looks at the so-called neutral or “R*” rate at 3%. The rate is considered to be the level where the policy is neither restrictive nor promotive. After the March meeting, the long-term rate estimate rose to 2.6%, indicating that other members are also more inclined.

Mester said rates were very low when the COVID pandemic hit and the Fed had little room to boost the economy.

“At this point, we are trying to adapt our policy to economic growth so that we can avoid acting aggressively,” he said.

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