The rotation of members on the U.S. Federal Reserve’s interest-rate-setting committee for 2024 indicates a slightly more hawkish stance than the previous group from 2023. However, this change will unlikely affect the expected shift towards interest-rate cuts in the coming year.
Many analysts hold a different viewpoint, suggesting that if inflation declines faster than anticipated, Federal Reserve policymakers may consider lowering interest rates beyond the three-quarters-of-a-percentage point indicated in the recent projections.
Decrease in Key Inflation Indicators
The publication of the private consumption price index on Friday, the Federal Reserve’s chosen indicator of inflation, further supported the existing perspective. The headline and core measures of inflation decreased more than expected by economists. This caused the average rates over the last three and six months to reach or fall below the Federal Reserve’s target of 2%.
In recent months, there has been a noticeable shift towards a more dovish stance among policymakers at the Federal Reserve. This shift is driven by mounting evidence suggesting that inflationary pressures are subsiding and job growth is slowing down in response to the Fed’s series of interest rate increases between March 2022 and July 2023.
Specifically, confident policymakers, such as Fed Governor Christopher Waller, who had previously advocated for rate hikes, have shifted their stance.
According to Brett Ryan, an economist at Deutsche Bank, there is a tendency for individuals to adopt a more cautious approach towards combating inflation. Due to the decrease in potential inflationary factors, there has been a shift in their perspective.
Following the decision by central bankers to maintain interest rates at a range of 5.25%-5.50% last week, Federal Reserve Chair Jerome Powell acknowledged that the Federal Reserve’s next consideration would be the timing of potential rate cuts. This statement caused bond yields to decline sharply and led to market expectations of swift and consecutive reductions in policy rates beginning in March.
However, even if the cuts are implemented at a later stage, and more gradually, as policymakers have indicated, the decisions made by investors align with the shift in the Federal Reserve leader’s stance.
According to Tim Duy, an economist at SGH Macro Advisors, it would need to be more accurate to label Powell unintelligent. If the individual expressed a forecast of a rate reduction exceeding 75 basis points, they likely had a specific rationale behind their statement.
One possible explanation, as stated by Duy, is that as the effects of lower inflation spread throughout the economy, companies that were able to increase prices this year may face challenges next year. Consequently, they may resort to reducing labor expenses to safeguard their profits. The intention behind signaling a more straightforward policy ahead is to prevent the occurrence of disinflationary dynamics that could be detrimental.
Another reason for potential rate cuts in the upcoming year is the decrease in inflation. The actual borrowing costs increase when the benchmark rate remains unchanged while inflation decreases. The Federal Reserve needs to adjust its policy rate accordingly to avoid excessive tightening.
According to BMO economist Scott Anderson, if the Federal Reserve chooses to pursue a more assertive approach to monetary policy, it would primarily be driven by concerns regarding inflation rather than factors such as economic growth or a sudden increase in unemployment.
In the upcoming year, additional data will be available before the Federal Reserve’s next meeting on January 30-31. This data will include information on the U.S. unemployment rate, which currently stands at 3.7%. This rate is only slightly higher by a tenth of a percentage point compared to when the Federal Reserve started increasing interest rates.
Rotation of Voters at the Federal Level
According to financial analysts at Deutsche Bank, BMO, and other institutions, it is believed that the four Federal Reserve bank presidents who will have the opportunity to vote on policy next year following the Fed’s rotation rules are likely to be less supportive of rate cuts compared to their predecessors.
One of the voters in the 2024 election is Raphael Bostic, who holds the position of Chief of the Atlanta Federal Reserve. While displaying a cautious approach towards potential job losses, this individual has expressed their belief that the Federal Reserve policy rate should reach 4.75% to 5% by the end of next year, aligning with their fellow policymakers.
Based on recent projections, most of his colleagues believe a lower range would be suitable.
Accompanying Bostic are Loretta Mester, President of the Cleveland Fed, and Thomas Barkin, President of the Richmond Fed, both known for their more hawkish stance. Mary Daly, President of the San Francisco Fed, who is considered a centrist, completes the group of four voters for 2024.
In 2023, the voting members of the Federal Reserve System included the Minneapolis and Dallas Federal Reserve Banks presidents, who held a more aggressive stance on monetary policy, and the presidents of the Philadelphia and Chicago Federal Reserve Banks, who had a contrasting perspective.
The views of Federal Reserve policymakers regarding interest rates are subject to change based on the available data. In recent months, Mester has expressed some uncertainty regarding the necessity of implementing additional tightening measures.
The composition of the voting lineup may undergo modifications. According to the Federal Reserve’s regulations, Austan Goolsbee, the Chicago Fed chief, would assume Mester’s voting right after her retirement in June unless the Cleveland Fed appointed a new president by then.
All 19 members of the Federal Reserve’s policymaking committee, including those who do not have voting rights, actively participate in the discussions that influence the policy decisions.
Several dynamic factors may impede or reverse the advancements in controlling inflation, reigniting the cautious stance prevalent among most individuals throughout the current year.
A prolonged interruption of traffic in the Suez Canal due to Houthi terrorist assaults on vessels in the Red Sea has the potential to increase the prices of goods. This comes after six months when inflation has been decreasing.
An increase in consumer confidence may pave the way for enhanced expenditure in the future.
Improved financial conditions, indicated by the 10-year yield returning to its previous level from July when the Federal Reserve last increased interest rates, may stimulate borrowing and investment.
Job growth can exceed expectations, similar to the trend observed throughout the previous year.
As stated by Nancy Vanden Houten from Oxford Economics, there are potential risks that could impede the progress of inflation. In summary, the individual expressed their belief that the Federal Reserve is unlikely to modify its policies in response to international disbelief unless it is perceived to have a significant and enduring impact. Considering the current policy rate level, it is anticipated that there will be a decrease in both spending and job growth in the upcoming year.
The expert predicts that the actual data will overshadow the significance of the rotating group of Federal Reserve voters. The data provides support for the anticipated three-quarter-point rate cuts favored by the majority of policymakers.