Understanding the Market | Devastating Blow to US Stocks! What Did the Federal Reserve Director Actually Say?
Director Waller stated that caution should be exercised to avoid excessive tightening; there is no reason to take action as quickly as in previous interest rate cycles. When the timing is right, interest rates can and should be lowered in a deliberate and cautious manner.
Federal Reserve Board member Warrell, who has permanent voting rights on the Federal Open Market Committee (FOMC), acknowledges the possibility of interest rate cuts this year but believes that action should not be taken hastily.
On Tuesday, January 16th, Warrell warned against keeping high interest rates for too long, stating that "future policy-making needs to be more cautious to avoid excessive tightening." He expressed that as long as inflation does not rebound and remains low, the Federal Reserve will be able to cut interest rates this year. However, the process of rate cuts should be "carefully calibrated, rather than rushed." Interest rate cuts should not be rushed until it is clear that inflation will continue to decline.
Warrell stated that recent inflation and labor market data have given him more confidence, believing that the Federal Reserve is "within reach" of the 2% inflation target. However, he mentioned that he would like to see more information in the coming months to confirm or refute this point. "This target cannot be achieved overnight."
Warrell mentioned that he will pay special attention to the revision of inflation data by the U.S. Department of Labor on February 9th. A year ago, inflation around the end of 2022 seemed to be slowing down significantly, but subsequent revisions by the Department of Labor erased signs of this improvement.
Some media outlets pointed out that Warrell was previously a leading advocate for raising interest rates quickly and maintaining high rates, and his speech on Tuesday implied a change in his stance. However, Warrell also poured cold water on the market's expectations of interest rate cuts by the Federal Reserve.
Warrell said,
"As long as the labor market and economic activity remain robust, I see no reason to take action as quickly as in the past (rate-cutting cycles). When the time is right to start cutting rates, I believe it can and should be done in an orderly and cautious manner."
Warrell reiterated his support for a total of three interest rate cuts this year, significantly lower than the market's expectation of six cuts. Warrell stated that his views align with the FOMC's economic projections released last month. The median expectation in the economic projections shows three 25-basis-point rate cuts in 2024.