Federal Reserve Bank of Boston President Susan Collins said on Thursday, January 9, that significant uncertainty about the outlook requires the United States financial regulator to take a cautious approach in the context of making decisions about cutting interest rates.
Susan Collins stated in the text of a speech prepared for an event at her bank that, in general, the US economic system is in a good place. She also separately noted that the monetary policy of the country’s financial regulator is closing a more neutral stance. Susan Collins stated that she views the current nature of uncertainty as requiring a gradual and patient approach to policymaking.
It is worth noting that uncertainty as the present state of affairs can be described as a situation that is relevant at the global level. To a large extent, this order of things, which forms the current configuration of the world’s reality, is related to the ongoing and gradually growing tension in the space of geopolitical relations. The interaction between many capitals is consistently deteriorating. In a global context, stability is not sustainable. In this case, it is worth mentioning the ongoing military conflicts in different parts of the world and the risk of new armed confrontations materializing. Also, there is currently no favorable system of conditions and circumstances in the global trade area. For example, Beijing and Washington impose mutual trade restrictions. The United States has limited the export of advanced chips and equipment for the manufacture of microcircuits of the appropriate category to China. As part of the retaliatory measures, Beijing has banned shipments of several minerals to the US. It is also expected that the implementation of the repeatedly announced by Donald Trump, who won the presidential election in the United States in November and will return to the White House this month, to increase tariffs on imported goods will provoke increased tensions in the global trade area. It is unknown what configuration of the world’s reality will be formed as a result of the current geopolitical situation. It is possible that the space of the global economy will be fragmented according to the block principle. At the same time, this is a likely but not guaranteed scenario for the future. So far, uncertainty remains, putting significant pressure on the economy both at the global level and within the relevant regional systems.
Susan Collins noted that the inflation rate in the United States has decreased significantly compared to the peak seen in 2022. Also, according to her, data on the situation in the space of the US economic system indicate that inflation is gradually, albeit unevenly, returning to the Fed’s target of 2%. Moreover, she separately noted that the decrease in the mentioned indicator was achieved even as the job market remained generally healthy and rebalanced from overly hot conditions.
Susan Collins’ statements were made against the background of the process in the framework of which central bankers began to weigh the state of affairs in the US economic system and the prospects for further changes in the Fed’s monetary policy following last month’s Federal Open Market Committee meeting, at which officials trim their interest rate target by a quarter of a percentage point to 4.25-4.5%.
Many representatives of the central bank of the United States have recently been cautious about making any forecasts or comments about the lowering of borrowing costs. The corresponding position is largely related to expectations that inflation will remain high for longer than was envisaged by the initial expectations about the dynamic of this indicator provided. Fed’s officials also backed off on the number of borrowing cost lowering projected for 2025.
Susan Collins supported the interest rates cut last month. At the same time, she described the relevant decision by the central bank of the United States as a close call, which provided some additional insurance to preserve a healthy labor market while maintaining a restrictive monetary policy stance that continues to be necessary to sustainably restore price stability.
Currently, there is an active discussion in the financial markets about the likelihood that the Fed will be able to deliver another interest rates cut in January. In the present month, officials of the central bank of the United States will hold a meeting on monetary policy issues, at which a decision may be made regarding lowering the cost of borrowing that can be either positive or negative. The return of Donald Trump to the White House is a factor complicating the making of the mentioned decision to a certain extent. In this context, there is uncertainty about which of Mr. Trump’s stated intentions at the level of official rhetoric will be implemented in the practical plane. It is worth noting that Donald Trump, in addition to raising tariffs on imported goods, also announced plans to tighten Washington’s migration policy, which includes, among other things, measures such as deportation. According to most experts interviewed by media representatives, the materialization of the specified intentions will make it difficult for inflation to return to the Fed’s target of 2%. Also, in the context of these assumptions, the possibility has been repeatedly mentioned that inflation may start moving in the opposite direction relative to the US financial regulator’s target and demonstrate rapid growth.
Some experts suggest that Donald Trump may partially implement or not implement his tariff threats at all, using appropriate rhetoric as a factor in strengthening the United States’ position in negotiations with other countries on political and economic interaction. This assumption cannot be described as unviable, but at the same time, its realism is definitely not high. In the corresponding context, it is worth mentioning that during his first term as president, which lasted from January 2017 to January 2021, Donald Trump imposed tariffs on several Chinese goods and sanctions on some companies from the Asian country, including Huawei and SMIC. Also, before the presidential election that was held in November 2016, Mr. Trump, in his public statements, repeatedly spoke negatively about the then-current practice of trade relations between the United States and China.
Susan Collins noted that it is too early to tell how future policy changes by the new administration and Congress will affect the trajectories of inflation and economic activity. She did not specify her expectations regarding the future course of the monetary policy of the United States, but said that in general, her views on the approach to interest rates and the economy coincide with the forecasts published by the US financial regulator last month.
Susan Collins underlined that Fed policy is not on a preset path and that it is currently well-positioned for what may come. It was also noted that she now sees stickier inflation levels going forward compared to her recent views.
Moreover, on Thursday Philadelphia Federal Reserve President Patrick Harker said he still expects the US financial regulator to cut interest rates. At the same time, it was noted that the monetary policy path of the central bank of the United States is overshadowed by considerable economic uncertainty. Patrick Harker stated that he still sees the US financial regulator on a downward policy rate path. The corresponding statements about the prospects of lowering the cost of borrowing were contained in the text of a speech to be given to the National Association of Corporate Directors New Jersey Chapter’s Economic Forecast 2025.
Patrick Harker does not have a vote on the central bank’s rate-setting Federal Open Market Committee this year and faces mandatory retirement due to Fed rules.
Mr. Harker stated that the overall underpinnings of the United States economy remain strong. At the same time, he noted that the current unsettled times limit provides guidance about what lies ahead on the policy path. According to him, in the face of uncertainty, monetary policy should remain data-dependent and be best positioned to respond to upcoming risks.
Patrick Harker stated that the underpinnings of the US macro economy remain strong. Separately, he noted that the central bank of the United States has managed to achieve success in its efforts to lower price pressures, although inflation is still higher than desired. Patrick Harker said it takes longer than expected for inflation to return to the 2% target.
Moreover, Mr. Harker noted that labor markets have stabilized and remain healthy. At the same time, he expressed concern that there are now growing signs that lower-wage earners are facing higher levels of stress.
In November, the preferred underlying inflation gauge of the central bank of the United States accelerated to 2.8%. The market-based measure remains more or less unchanged, remaining at 2.4% since May. It is worth noting that in recent years, officials of the central bank of the United States have increasingly cited market-based inflation as a reason to maintain confidence in their outlook.
Currently, investors have soured the chances that the US financial regulator will cut interest rates in 2025. The corresponding estimate is observed against the background of repeated statements by officials of the central bank of the United States that a decision on lowering the cost of borrowing will be appropriate when more progress is made in moving inflation towards the 2% target.
Also this week, Federal Reserve Governor Christopher Waller stated that he believes that inflation will continue to move towards the mentioned target. For him, this assumption is a sufficient argument in favor of supporting additional lowering of borrowing costs by the US financial regulator in 2025. At the same time, Christopher Waller said that the degree of monetary policy easing by the central bank of the United States will depend on the extent of progress in the process of bringing inflation closer to the 2% target.
It is highly likely that in January the Fed will not rush in the context of deciding on interest rates. At the same time, this does not mean that the central bank of the United States is guaranteed not to cut the cost of borrowing in the current month. The corresponding probability is not maximal, but the fact of its existence is obvious.
Federal Reserve Governor Michelle Bowman said on Thursday in prepared remarks for an event with the California Bankers Association that the inflation rate in the United States has decreased significantly in 2023. At the same time, she noted that the corresponding progress seems to have stalled in 2024. Also in this context, it was mentioned that core inflation continues to exceed the target of the central bank of the United States at 2%. Michelle Bowman stated that she continues to be a proponent of a cautious and gradual approach to adjusting the monetary policy of the US financial regulator. It is worth noting that she has repeatedly warned about the risks associated with inflation. Also, in her opinion, the current monetary policy stance of the central bank of the United States may not have a significant restraining effect on the country’s economy. Michelle Bowman stated that she continues to be concerned about the mentioned circumstance. According to her, against the background of continued economic growth, it seems unlikely that the current level of interest rates provides meaningful restraint.
Michelle Bowman dissented from the fact that in September, at the initial stage of monetary policy easing, the Fed decided to lower the cost of borrowing by half a percent. It is worth noting that this decision came as a surprise to many. Experts assumed that the central bank of the United States would take smaller-scale actions as part of the initial stage of monetary policy easing. After the September meeting of the US financial regulator, two more decisions were made on lowering the cost of borrowing. As a result, the cumulative decrease in this indicator amounted to a full percentage point since September.
Michelle Bowman supported the Fed’s decision to cut interest rates at the last meeting of 2024, held in December. She considers this decision as the final step of the officials in the policy recalibrating phase, reflecting the cooldown in inflation and the labor market. At the same time, Michelle Bowman was ready to support the absence of changes in the cost of borrowing in December. She explained her corresponding position by such circumstances as the lack of further progress in declining inflation and the continued growth in the areas of economic activity and the labor market.
Michelle Bowman noted that the economic system of the United States is showing solid growth. She also stated that the US labor market is close to full employment.
When asked about the impact on inflation and the economy by Donald Trump’s plans for tariffs, taxes, and migration policy, Michelle Bowman said that policymakers should refrain from anticipating the incoming administration’s future policies. According to her, it is needed to wait for more clarity and then seek to understand the effects on economic activity, the labor market, and inflation.
The media released information according to which the new Donald Trump administration is considering Michelle Bowman for the Fed vice chair for supervisory role after the current holder, Michael Barr, announced this week that he would resign from the position. It is worth mentioning that Donald Trump nominated Michelle Bowman to the board of the central bank of the United States in 2018. She stated that over the past two years, proposals have been made that could materially reduce the tailoring of regulatory requirements. Michelle Bowman specifically pointed to a bank capital proposal that would force the largest lenders in the United States to hold more capital to buffer against losses and financial crises. She opposed this plan. Michelle Bowman stated that the mentioned plan and another on long-term debt requirements at larger banks raise significant policy questions about whether the costs are justified by the benefits and generate significant risks of unintended consequences. She also separately noted that the mentioned questions were not sufficiently addressed in the proposals.
Moreover, Michelle Bowman drew attention to the fact that this year banking agencies will undergo a transition in leadership. She expects that the relevant process will facilitate a shift in priorities and approaches.
Federal Reserve Bank of Richmond President Thomas Barkin on Thursday during a virtual event hosted by the Virginia Bankers Association said that the rise in long-term interest rates reflects higher risk premiums as opposed to concerns about inflation. In his opinion, there is no question that as a lot more federal debt comes into the market, that it is at times overwhelming the demand, and that is what creates the increase in yields. He characterizes inflation as a term premium. Also, according to him, the term premium has something to do with risk. Moreover, he senses it has something to do with the balance of supply and demand in the long end.
Thomas Barkin does not vote on Fed interest-rate decisions this year.
It is worth noting that this week the yield on long-term Treasury securities showed growth, reaching the highest level in more than a year. Also last Wednesday, January 8, the yield on 20-year bonds briefly exceeded 5%.
Federal Reserve Bank of Kansas City President Jeff Schmid said on Thursday that he supports a slowdown in the pace of interest rate cuts, but only after persistent changes in incoming economic data. In his opinion, the most appropriate approach is to gradually adjust monetary policy in the future and only in response to a steady change in the tone of the data. In prepared remarks for an event in Kansas City, he noted that the strength of the economy allows the Fed to be patient.
Jeff Schmid also stated that, in his opinion, interest rates are currently close to the level which does not restrict or stimulate the economy. He also assumes that nowadays the cost of borrowing is very close to its longer-run level.
This year Jeff Schmid votes on monetary policy. In the last few months, he has favored a slower cutting of interest rates. Also in November, Jeff Schmid stated his skepticism about how much further the cost of borrowing would need to come down. As for the current perception of the inflationary process in the United States, in the context of this issue, he adheres to an optimistic point of view. Jeff Schmid stated that price pressures are still easing. At the same time, in this context, he draws attention to the fact that inflation in the United States has not yet reached the central bank’s target of 2%. Jeff Schmid also described the labor market as healthy.
The Federal Reserve Bank of Kansas City President believes that the moment is approaching when the economic system of the United States will need neither restrictions nor support. In the context of the relevant situation, the Fed’s monetary policy, according to him, should be neutral. The mentioned opinion is based on such facts of reality as inflation approaching the target of the central bank of the United States at 2% and economic growth gaining momentum.
It is worth noting that Fed officials have planned only two interest rate cuts for the current year. At the same time, it is worth noting that against the background of certain conditions and circumstances of economic reality, the relevant intention may change. In this case, a lot depends on what decisions the Donald Trump administration will make on the economic plane.
Jeff Schmid stated that he will continue to advocate policies that minimize the central bank of the United States’ footprint on financial markets, including the ongoing shrinking of the balance sheet.
Policymakers have been letting maturing Treasuries and mortgage-backed securities roll off the Fed’s balance sheet. The purpose of these actions is to shrink the size of the balance sheet. It is worth noting that after the coronavirus pandemic, the corresponding figure rose to almost $9 trillion. Jeff Schmid stated that he would like to see a further decline in the current year. According to him, shrinking the Fed’s footprint will reduce its distortion of asset prices. Jeff Schmid would also like the balance sheet to hold only Treasuries and its composition shifted more to shorter duration assets. It’s worth noting that some of his colleagues support this point of view.
It is worth noting that the Fed has slowed down the pace of shrinking its balance sheet. According to media reports, many economists expect that at some point in 2025, officials at the United States central bank will completely halt their corresponding efforts. In their opinion, the appropriate decision will be made to preserve the liquidity of the money market.
