Cleveland Fed President Loretta Mester Cautions About Early Rate Cuts
Cleveland Fed President Loretta Mester expressed caution about the market’s anticipation for rate cuts in early 2024. In an interview with the Financial Times, Mester remarked that the market may have jumped the gun on rate cuts and emphasized that it’s premature to discuss easing measures. Mester believes the focus should not solely be on when to reduce rates, but rather on how long monetary policy should remain restrictive to ensure sustainable and timely inflation at 2%.
Recent data revealed that US inflation slowed to 3.1% year over year in November, further fueling investor hopes for imminent rate cuts. Mester’s comments aligned with her central bank counterparts John Williams and Raphael Bostic, who also downplayed the likelihood of rate cuts in the near term. During the latest Federal Reserve meeting, policymakers maintained steady rates but hinted at potential rate cuts of up to 0.75 percentage points in 2024. As a result, futures markets have increasingly positioned themselves for easing policy.
Inflation Cooling Presents Opportunities for Rate Reductions, says Goldman Sachs
In contrast to the cautious sentiment expressed by some Fed officials, Goldman Sachs economists anticipate that cooling inflation will create opportunities for the Federal Reserve to lower interest rates significantly. Jan Hatzius, a Goldman economist, argued that the world is entering a period of “Great Disinflation,” enabling policymakers to implement rapid and substantial rate cuts. Hatzius predicted at least three consecutive 25-basis-point cuts, possibly scheduled for March, May, and June.
Fed Chairman Jerome Powell has also signaled a dovish outlook, suggesting that rate cuts could occur sooner than previously anticipated. Against this backdrop, traders are anticipating a total of five rate cuts, with the first potentially taking place in March, according to CME’s FedWatch tool.
With uncertainty still looming, the next stage in monetary policy is not simply determining when to implement rate cuts, but rather deciding the duration of restrictive measures to ensure sustained and appropriate inflation levels.