New York Federal Reserve President John Williams pushed back Friday on the notion that Fed officials are now focusing on interest rate cuts in the coming months.
Williams told CNBC that he and other members of the Federal Open Market Committee aren’t yet discussing lowering interest rates, remarks at odds with the market's interpretation of Fed Chairman Jerome Powell's comments just a few days earlier.
THE ECONOMIC INDICATOR SCREAMING THAT INFLATION IS NOT VANQUISHED
“We aren’t really talking about rate cuts right now,” Williams said on Friday. “We’re very focused on the question in front of us, which as Chair Powell said … is, have we gotten monetary policy to sufficiently restrictive stance in order to ensure the inflation comes back down to 2%? That’s the question in front of us.”
Two better-than-expected inflation reports this week cemented the Fed’s decision to hold rates steady and not hike, and investors, assessing the economic landscape and tone of Powell’s press conference, are now betting on several rate cuts beginning as soon as March.
Investors now see a 70% probability that the Fed will cut rates in or before March, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
The Fed’s updated projections showed that Fed officials are penciling in about three rate cuts in the coming year. But investors are now pricing in at least six rate cuts this year, showing a mismatch with the central bank’s expectations.
When asked about futures pricing in a March rate cut, Williams said he thinks “it’s just premature to be even thinking about that.”
He also left the door open to more rate hikes should too-hot inflation start trending up in the new year — something that would be a nightmare scenario for investors.
“It is looking like we are at or near that in terms of sufficiently restrictive, but things can change,” Williams said. “One thing we’ve learned even over the past year is that the data can move and in surprising ways, we need to be ready to move to tighten the policy further, if the progress of inflation were to stall or reverse.”
This week, the stock market broke new records, buoyed by optimism from investors that rate cuts will soon begin.
Inflation, as gauged by the consumer price index, dropped a tenth of a percentage point to 3.1% for the year ending in November, the Bureau of Labor Statistics reported this week. That is down from a smoldering high of about 9% in June of last year.
Additionally, wholesale inflation, as measured by the producer price index, declined three-tenths of a percentage point to 0.9%. On a month-to-month basis, wholesale inflation was flat at 0%.
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On Wednesday, officials updated their projections for inflation. Fed officials now see inflation, as gauged by the personal consumption expenditures index, at 2.8% by the end of this year, compared to a September projection of 3.3%. They see inflation falling to 2.4% by the end of 2024.
The Fed expects the economy to slow next year, although is still projecting that there will be a positive gross domestic product gain in 2024.