Senior Fed officials call for gradual interest rate cuts!

A senior official from the Federal Reserve said that after the unusually large 50 basis point rate cut earlier this month, the Fed should resume "gradual" rate cuts.

St. Louis Fed President Alberto Musalem said, "The U.S. economy may respond 'very forcefully' to looser financial conditions, stimulating demand and extending the time to achieve its 2% inflation target."

Musalem told the Financial Times last Friday, "For me, the rate cut is about easing the brakes on the economy at this stage and gradually reducing restrictions on policy."

In forecasts released earlier this month, he was one of the officials expecting multiple rate cuts by the Fed this year. Musalem became the St. Louis Fed President in April and will become a voting member of the Federal Open Market Committee (FOMC) next year.

Less than two weeks ago, the Fed abandoned a more traditional 25 basis point rate cut and initiated its first easing cycle since the outbreak of the COVID-19 pandemic in early 2020 with a 50 basis point cut. This substantial rate cut kept the federal funds rate between 4.75% and 5%. Fed Chairman Powell stated that this move aims to maintain the strength of the world's largest economy and avoid a soft labor market in the face of falling inflation.

Last Friday, the Fed's preferred inflation gauge—August PCE year-on-year—fell to 2.2%, more than expected. Following the data release, interest rate futures traders believed that the likelihood of a 50 basis point rate cut by the Fed in November was slightly higher than a 25 basis point cut.

Musalem supported a significant rate cut in September, acknowledging that the labor market had cooled in recent months, but remained optimistic about the outlook given low layoff rates and the economy's underlying strength. He said the business sector is in a "good condition," overall business activity is "stable," and added that large-scale layoffs do not seem "imminent."

However, he acknowledged the risk that could prompt the Fed to cut rates faster. He said, "I realize that the weakness in the economy may exceed my current expectations, as well as the labor market. If that's the case, accelerating the pace of rate cuts may be appropriate."

This aligns with comments from Fed Governor Waller last week, who said he would be "more willing to actively cut rates" if data weakens more quickly. Musalem stated that the risks of economic weakness or excessive growth are now balanced, and the next rate decision will depend on the data at that time.

The Fed's latest "dot plot" shows that most officials expect policy rates to fall by another 50 basis points during the remaining two meetings this year. The next meeting will be held on November 6, the day after the U.S. presidential election.

However, officials have differing views, with two suggesting that the Fed should postpone further rate cuts, while seven others predict only a 25 basis point cut this year. Policymakers also expect policy rates to fall by another 100 basis points in 2025, ending the year between 3.25% and 3.5%, and to slightly below 3% by the end of 2026 Regarding the claim of "catch-up rate cut" for the 50 basis point rate cut in September due to the Federal Reserve being too slow in easing monetary policy, Mursi Lemu refuted it, stating that the speed of inflation decline far exceeded his expectations.

He said: "(A significant rate cut) sends a strong and clear message to the economy that we are starting from a very favorable position, which is appropriate."