Federal Reserve Governor Cook: The Federal Reserve should gradually lower interest rates, with data guiding the pace

Federal Reserve Governor Lisa Cook stated that over time, the Federal Reserve is likely to lower interest rates to a more neutral stance, citing progress on inflation and a robust labor market.

Cook described the risks to the Fed's employment and inflation targets as "roughly balanced." She mentioned that she believes the direction of interest rates is downward, but the "magnitude and timing" of rate cuts will depend on new data and economic outlook.

In a prepared speech at an event at the University of Virginia on Wednesday, Cook said, "Over time, it may be appropriate to shift the policy interest rate to a more neutral stance." A neutral policy stance refers to neither stimulating nor restricting economic activity.

Fed officials have lowered rates in the past two meetings, and they will announce their next policy decision after the meeting on December 17-18. Given the strong inflation data and a series of comments from policymakers suggesting that the Fed should proceed cautiously with future rate adjustments, investors have lowered their expectations for another rate cut at the December meeting. Fed Chair Jerome Powell stated last week that the economy has not signaled that officials need to rush into rate cuts.

Cook noted on Wednesday that "significant progress" has been made in reducing inflation, but the rise in core inflation (which excludes the more volatile categories of food and energy) indicates that "we have a long way to go before we can be confident in achieving the 2% inflation target."

She said, "While most price indicators suggest progress is being made, I expect there will be bumps along the way." She anticipates that both overall and core inflation rates will fall to 2.2% next year, and a slowdown in wage growth will further bolster her confidence in a sustained decline in inflation.

Meanwhile, Cook believes the labor market is solid. In 2024, the labor market is expected to cool, with job vacancies decreasing and the unemployment rate rising. Nevertheless, both the unemployment rate and layoff rates remain relatively low overall.

Cook stated, "The labor market is in good shape—supply and demand for workers are roughly balanced, so it is no longer a source of inflationary pressure in the economy." She added that the downside risks to employment have "diminished recently."

However, she indicated that national job growth "may not be strong enough to keep the unemployment rate at its current low level."

Cook also outlined possible scenarios for the Fed's future policy path. She said, if the labor market and inflation continue to develop as she predicts, over time, "lowering interest rates until we approach the neutral rate may be the appropriate course of action." However, "if inflation progress slows while the labor market remains robust, I think we may pause on policy cuts. Alternatively, if the labor market weakens significantly, then a faster easing of policy may be appropriate."

Fed officials will release new forecasts for the economy and interest rate trends after the December meeting