Recent comments from various Federal Reserve officials have prompted the markets to reconsider whether their expectations for the pace of interest rate cuts have been overly optimistic. Following strong retail sales and job growth data for September, speculation has arisen that the Fed might slow down its rate-cutting efforts, and there’s even talk of a possible pause in cuts during the upcoming meetings in November or December.
Torsten Slok, Chief Economist at Apollo Global Management, has indicated that the likelihood of the Fed maintaining current rates in November is increasing.
In his first public comments since August, Kansas City Federal Reserve President A. G. Schmid said he hopes the policy cycle can “normalize,” meaning the Fed should carefully adjust rates to support economic growth, price stability, and full employment. He mentioned that a slower pace of rate cuts could help the Fed identify what is termed a neutral level of policy, where it neither pressures the economy nor stimulates it excessively.
“I am optimistic that we can achieve such a cycle without any significant shocks,” Schmid noted, adding that it would require a cautious, gradual approach to policy changes.
He also stated, “While I support easing some of the restrictive policies, I tend to avoid large moves, especially considering the uncertainties surrounding our ultimate policy destination, as well as the need to prevent increased volatility in financial markets.”
Similarly, Minneapolis Federal Reserve President Neel Kashkari reiterated his inclination to slow down the pace of rate cuts in the upcoming quarters. He said, “As of now, I forecast several modest cuts in the coming quarters to reach a neutral level, but this will depend on the data.” He emphasized that to accelerate any actions, clear evidence of a rapidly weakening labor market would be required.
Dallas Federal Reserve President Lorie Logan also echoed similar sentiments earlier in a speaking engagement with the New York Securities Industry and Financial Markets Association.
Slok from Apollo highlighted that, based on the Atlanta Federal Reserve’s estimate of a 3.4% GDP growth in the U.S. for the third quarter, the economy is in a sustained growth trend with inflation potentially re-emerging, which he described as a “soft landing.”
This economist pointed out that there are “ten significant tailwinds” for the U.S. economy, which increases the odds that the Fed will have to change direction and pause rate cuts at the November meeting.
However, San Francisco Federal Reserve President Mary Daly, who has a vote in the FOMC this year, stated, “So far, I haven’t seen any information indicating that we won’t continue to lower rates.” She added, “For an economy that is already nearing the 2% inflation target, this is a very restrictive rate level, and I don’t want to see the labor market deteriorate further.”
The Federal Reserve is scheduled to hold its policy meeting on November 6-7, right after the U.S. election voting day. Following this Friday, the officials will enter a quiet period, during which they are prohibited from publicly commenting on monetary policy.