The outlook for Trump's policies is uncertain, the Federal Reserve is cautious, and this year's voting committee unanimously supports gradual interest rate cuts
This year, voting member and President of the Boston Federal Reserve, Collins, stated that the economic outlook is very uncertain, and interest rate cuts need to be gradual and patient, expecting the number of cuts this year to decrease to two from previous expectations; another voting member this year, President of the Kansas City Federal Reserve, Schmidt, said that if economic data improves, it supports gradual rate cuts; the Federal Reserve is close to a neutral interest rate, nearing the achievement of its dual mandate of inflation and employment, and further balance sheet reduction is needed; voting member for 2026 and President of the Philadelphia Federal Reserve, Harker, stated support for further rate cuts this year, but the timing depends on data, and action should be paused for now; voting member for 2027 and President of the Richmond Federal Reserve, Barkin, stated that it is the term premium, not inflation, that is pushing up long-term interest rates
Including the two voting committee members with voting rights at this year's monetary policy meeting, recent statements from Federal Reserve officials suggest that, given the uncertain economic outlook influenced by policies since Trump's administration and potential upward pressure on inflation, they are cautious about future interest rate cuts.
Boston Fed President: Economic outlook is highly uncertain, need gradual and patient rate cuts
On Thursday, January 9th, Eastern Time, Susan Collins, President of the Boston Federal Reserve and a voting member of the Federal Open Market Committee (FOMC) in 2025, stated that there is "considerable uncertainty" in the U.S. economic outlook, and therefore, the pace of rate cuts should be slowed down. She said:
"I believe the current uncertainty requires us to adopt a gradual and patient approach to policy-making."
Collins commented that the U.S. economy is in a "good state," with inflation steadily moving away from the peaks of 2022. The current monetary policy of the Federal Reserve is closer to a neutral level, allowing the Fed to take a gradual and patient approach in assessing future actions.
Collins stated that the Fed's "policy is fully capable of making necessary adjustments based on changing circumstances—if inflation does not show further (downward) progress, then (interest rates) will remain at current levels for a longer time, and if necessary, the easing of policy will accelerate."
Collins pointed out that the trade and fiscal policies of the Trump administration and the new Congress may alter the trajectory of the economy, but it is too early to estimate the outcomes now.
Previously, Collins told Bloomberg on Wednesday that she expects the progress of inflation cooling in 2025 to be slower than anticipated a few months ago. Her expectations for interest rates align with the median forecasts released by Fed officials after the December 2024 meeting. According to the economic outlook and dot plot released after the meeting, Fed officials expect two rate cuts of 25 basis points this year, halving the expected number of four cuts announced in September.
Kansas City Fed President: Fed is close to neutral interest rate, supports gradual rate cuts, needs further balance sheet reduction
Like Collins, Jeffrey Schmid, President of the Kansas City Federal Reserve and a voting member of the FOMC in 2025, stated on Thursday that interest rates may be very close to a longer-term neutral level. If economic data improves, he leans towards gradual rate cuts. Any further rate cuts in the future should be gradual and data-driven. Strong economic performance will allow the Fed to remain patient.
Schmid stated that most of the Fed's inflation and employment missions have recently been achieved, and it is close to fulfilling its dual mandate, needing to begin reducing the balance sheet (balance sheet reduction), hoping to see the balance sheet size continue to decline. The Fed's holdings should adjust to only hold U.S. Treasury securities.
Schmid noted that while the job market remains healthy, it is somewhat weaker, and the Fed needs to remain vigilant about inflation, but at the same time, he is "quite optimistic" that inflation will continue to decline, and he feels optimistic about the outlook for economic growth and employment.
Philadelphia Fed President: Supports further rate cuts this year, but timing depends on data, should pause actions now
Patrick Harker, President of the Philadelphia Federal Reserve and a voting member of the FOMC in 2026, stated on Thursday that he is prepared to support further rate cuts in 2025, but the specific timing of actions depends on economic conditions There is uncertainty regarding the neutral interest rate, and caution should be maintained. Harker said:
"I still believe we are on the right track for rate cuts. Based on everything I see right now, I will not deviate from this path or turn back. However, the specific pace at which I continue down this path will entirely depend on the data that will be released soon."
Harker stated that it will take longer than expected for inflation to fall to the Federal Reserve's target of 2%, and the progress of declining inflation is not uniform. However, he believes that the overall U.S. economy is strong, and the labor market has cooled, approaching pre-pandemic levels.
Harker emphasized that the Federal Reserve should continue to rely on data rather than "acting hastily." He suggested pausing rate cuts for now to observe for a while, "let the data play out." He said:
"I think we should take a pause now and see how things develop; we can maintain the status quo for a while—perhaps not for too long."
Harker expects inflation to return to the target of 2% by 2026 but faces various upside risks to inflation, including the Russia-Ukraine conflict, conflicts in the Middle East, and political instability in some European countries.
When discussing domestic factors that could drive inflation in the U.S., Harker did not directly name Trump but mentioned that potential policy changes in the future could impact the economy. Additionally, he believes that avian influenza could also drive up food costs.
Richmond Fed President: Long-term rates are driven by term premium, not inflation
Thomas Barkin, President of the Richmond Fed, who will have voting rights at the FOMC meeting in 2027, stated on Thursday that the recent rise in long-term rates reflects an increase in risk premium rather than concerns about inflation. He said:
"I have no doubt that as more federal government bonds enter the market, sometimes overwhelming demand, that is the reason for the rise in yields."
"I believe this is not (due to) inflation, but rather term premium. Term premium is related to risk—but I think it is related to the long-term supply-demand balance."
Barkin noted that U.S. consumer debt remains below levels seen in 2018 to 2019. A lack of fiscal space could pose recession risks in the future