Mixed Signal from the Fed: Rate Cut Expectations Decline

3 mins read
Fed'den Karışık Sinyal: Faiz İndirimi Beklentileri Geriledi

The minutes of the Federal Open Market Committee (FOMC) meeting released last week show that Fed officials have concerns about rapid monetary policy easing. According to the minutes, Fed officials are considering the possibility that further progress in reducing inflation may take longer than expected.

Fed Officials Worried

At the meeting, Fed officials underscored uncertainty about how long the restrictive monetary policy stance should be maintained. “Most officials noted the risks of moving too quickly to loosen the policy stance and emphasized the importance of carefully evaluating incoming data in deciding whether inflation has fallen sustainably to 2 percent,” the minutes said.

Expectations in Money Markets Have Changed

Following these developments, money markets are certain that the Fed will leave interest rates unchanged in March, while the probability of a rate cut in May has fallen to 25 percent and the probability of a rate cut in June has fallen to 67 percent.

Fed’s Next Step

The Fed’s next interest rate decision will be announced on March 20. The rate is currently at 5.5 percent since July 26, 2023. Fed officials had announced that the cuts would start this year.

There are Different Opinions

However, there are divergent views among Fed officials on the rate cut. Standard & Poor’s forecasts that the Fed will cut its policy rate by 25 basis points in June and 75 basis points by the end of the year.

Statements from Fed Officials

Recent statements by Fed officials are also noteworthy. Richmond Fed President Thomas Barkin emphasized that price pressures persist in sectors such as housing despite the decline in headline inflation, while Fed Board Member Michelle Bowman expressed her opposition to the possibility of a rate cut in the near future.

Fed Vice Chairman Philip Jefferson pointed out that the Bank’s strong actions have moved the policy rate into very restrictive territory and that the tight monetary policy stance has put downward pressure on economic activity and inflation.

Jefferson said it would probably be appropriate to start lowering the policy rate later this year if the economy develops as generally expected, but said he could not give a timetable because of the risks.

Comments from Other Authorities

Philadelphia Fed President Patrick Harker also stated that the Fed’s cutting interest rates too early poses a risk. Stating that the Fed is on the last step of moving towards the 2 percent target in inflation, Harker said that the latest data show uneven progress in slowing inflation.

International Monetary Fund Spokesperson Julie Kozack also stated that although inflation is slowing, it is not yet close enough to the target and urged central banks to be cautious against premature easing of monetary policy.

All in all, uncertainties regarding the Fed’s monetary policy stance persist. In the upcoming period, incoming data and Fed officials’ statements will provide a clearer picture on the timing and amount of rate cuts.


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