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Two influential US rate-setters have signalled their support for a rate cut in the coming months, despite opposition from Donald Trump, who says a pre-election shift in borrowing costs would boost President Joe Biden’s chances in November.
Christopher Waller, a Federal Reserve governor, and John Williams, president of the New York Fed, both said on Wednesday that rate cuts from the central bank will soon be appropriate following improved inflation data and fresh signs that the labour market is cooling off.
“While I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted,” Waller said in a speech in Kansas City, Missouri.
Williams told The Wall Street Journal that the last three months of inflation data were “getting us closer to a disinflationary trend that we’re looking for”.
The Fed has kept is benchmark policy rate unchanged since last July at 5.25-5.5 per cent, but investors increasingly expect rate-setters to cut borrowing costs by a quarter point twice before the end of 2024 on the back of a fall in inflation closer towards its 2 per cent goal.
One of those cuts now appears likely to come at the Fed’s mid-September vote, the final meeting before the presidential election on November 5.
Trump issued a stark warning on Tuesday to the Fed not to cut its policy rate before the election, saying in an interview with Bloomberg that it was “something that they know they shouldn’t be doing”.
Waller and Williams said they need further evidence before giving the green light to a rate reduction — a view also espoused by chair Jay Powell earlier this month and other officials, which has dashed hopes of a cut as soon as their July meeting.
The rationale for cuts centres on the labour market, which after years of being a source of inflationary pressures has begun to soften, with the jobless rate ticking up to 4.1 per cent.
“As of today, I see there is more upside risk to unemployment than we have seen for a long time,” said Waller, adding that the labour market was now in a “sweet spot” and the hope was to keep it there.
Whenever cuts do begin, Williams hinted that the Fed would proceed gradually, balancing the risk that inflation remains elevated against the prospects of a rapid rise in unemployment.
“I do think there is a decision ahead of us at some point to decide, not to get out of a restrictive stance of policy, but to lower interest rates in a way that lessens how restrictive policy is,” he said.
Officials will receive a multitude of reports, including two more inflation and jobs updates, before their September gathering.
Waller said he could envision a rate cut “in the not-too-distant future” if both consumer price index reports were “favourable”.
The latest CPI reading, for June, was 3 per cent. The alternative Personal Consumption Expenditures measure, which the Fed uses for its 2 per cent inflation goal, was 2.6 per cent in May. The June PCE figure is out next Friday.
Any bumpiness in the disinflation process, which the IMF warned about as a possibility this week, could push back the timing of the first move.
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