"It is not over yet." Officials of the U.S. Federal Reserve (Fed) have been expressing caution day after day regarding the market's excessive expectations for interest rate cuts. Since the December Federal Open Market Committee (FOMC) declared that discussions on rate cuts had begun in earnest, this atmosphere has overheated, prompting even prominent doves (those favoring monetary easing) to issue statements to temper expectations.
Osthan Goolsby, president of the Chicago Federal Reserve Bank and regarded as a leading dove within the Fed, appeared on CBS's "Face the Nation" on the 17th (local time) and said, "We have made a lot of progress in 2023, but I am still warning everyone that it is not over yet."
President Goolsby reaffirmed his previous remarks that the U.S. economy is heading toward a soft landing, but pointed out, "It is too early to declare victory." He said, "Although one month of data remains, 2023 is expected to be a year in which inflation significantly slows without a large rise in unemployment. This is what I call the golden path," but added, "Inflation still exceeds the target. Counting chickens before inflation is confirmed to have fallen to the target is excessive." He also emphasized cautious progress regarding next year's rate cut outlook, stating that it will depend on data received in the future.
Last week, at the December FOMC regular meeting, the Fed kept U.S. interest rates steady at 5.25?5.5% and suggested through the dot plot that there could be three rate cuts over the next year. President Goolsby's remarks on this day, emphasizing that the fight against inflation is not over yet, can be interpreted as a warning that the market's premature expectations could adversely affect inflation overall. Compared to his dovish remarks just a few days ago, his stance has become more cautious. Goolsby, who holds a voting right at this year's FOMC, stated in an interview with the Wall Street Journal (WSJ) released on the 15th after the FOMC that if inflation falls more than expected, rate cuts should be discussed.
Before Goolsby, John Williams, president of the New York Federal Reserve and considered the third most influential Fed official, also expressed hawkish (favoring monetary tightening) remarks, showing caution toward market expectations. Williams appeared on CNBC on the 15th and said, "We are not talking about rate cuts right now," adding, "We are focused on maintaining sufficiently tight monetary policy to bring inflation back to the 2% target." This was interpreted as emphasizing that there was no concrete discussion of rate cuts at the December FOMC. He also described the possibility of a rate cut in March as "premature." On the same day, Raphael Bostic, president of the Atlanta Federal Reserve, said, "There is no need to lower rates until the second half of next year."
Currently, the market widely expects the Fed to begin its first rate cut in March next year and to implement about six cuts throughout the year. This is far above the three cuts forecasted in the Fed's December dot plot. Accordingly, the market is closely watching the inflation data to be released this week. If the November Personal Consumption Expenditures (PCE) price index, the inflation indicator preferred by the Fed, shows a slower pace than expected, market expectations for rate cuts next year could gain more momentum. Wall Street estimates that the November PCE, to be released on the 22nd, will rise 0.1% month-over-month and 3.2% year-over-year, continuing a slight slowdown trend.
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