Fed Officials Cite Job Risks Justifying Rate Cut as Debate Turns to Easing Pace

By Howard Schneider and Ann Saphir

WASHINGTON – U.S. Federal Reserve officials indicated on Monday that their recent half-point interest rate cut was designed to maintain what they perceive as a healthy balance in the economy. The goal is to support a scenario where inflation aligns with the Fed’s target and unemployment hovers near levels that are conducive to stable prices.

In comments made by three reserve bank presidents, they expressed their backing for last week’s rate reduction, highlighting that current policies could be overly restrictive given the easing of cost pressures and increasing risks in the labor market. This context necessitates a shift towards a more neutral interest rate approach.

Despite inflation and unemployment rates nearing the Fed’s objectives, rates remain at peak levels not seen in decades. "It makes sense to maintain high rates when cooling the economy, not when we want stability," stated Chicago Fed President Austan Goolsbee. He characterized the recent 50-basis point cut in the federal funds rate as a sign that the Fed is reconsidering its dual mandate, which aims for both low unemployment and stable prices, defined as a 2% annual increase in the Personal Consumption Expenditures price index.

The PCE inflation rate stood at 2.5% in July and is projected to continue its decline, a significant factor in discussions about the Fed’s potential decisions for its November meeting—whether to implement another half-point cut or reduce by a quarter point. Data for August will be available soon.

As of August, the unemployment rate was recorded at 4.2%, aligning with policymakers’ views of a desirable level that supports stable inflation.

Atlanta Fed President Raphael Bostic shared his perception that the economy is approaching a "normal" state for both primary economic indicators more rapidly than he anticipated. He suggested that monetary policy should also transition from its current restrictive position. He deemed last week’s half-point reduction an appropriate start to this process but emphasized the importance of prudence rather than haste in lowering rates given the current discussions surrounding the extent and pace of such cuts.

"Progress on inflation and the softening labor market has emerged much sooner than I initially believed," Bostic remarked during a talk at the European Economics and Financial Centre, stating he now envisions a quicker normalization of monetary policy than he previously thought would be necessary.

Minneapolis Fed President Neel Kashkari also endorsed the recent half-point cut, suggesting that he would have supported a quarter-point reduction as well. He indicated that two additional quarter-point cuts might be warranted before the year concludes due to shifting risks away from higher inflation toward a potential labor market downturn.

Despite the half-point adjustment, the current benchmark range of 4.75% to 5% is still regarded as tight.

DIVIDED OUTLOOK

Market reactions to the officials’ comments were subdued, with investors nearly split on whether the Fed would opt for a quarter-point cut or another half-point reduction at its upcoming November meeting.

The recent actions of the Fed lowered a policy rate that had been held at a 25-year high for 14 months while waiting for clear signs that inflation, which peaked at levels not seen in four decades in 2022, was stabilizing to the target level.

Bostic noted that recent data showed some measures of inflation dropping below 2% and that inflationary pressures were concentrated in the housing sector. He remarked on the unexpected speed of inflation reduction, mentioning that businesses have reported significant declines in their pricing power.

All three officials expressed agreement with the Fed’s recent actions, highlighting that current policies may be too tight in light of economic conditions. Their comments also underscored a growing debate on the pace at which the central bank should aim to reestablish a neutral policy stance, one that neither stimulates nor constrains economic activity—along with the appropriate level for that neutral rate.

While Fed policymakers consider the longer-term federal funds rate to be around 2.9%, they recognize that the short-term neutral rate could vary for different economic scenarios. Bostic suggested it might be in a range of 3% to 3.25%, but emphasized the robust nature of discussions among policymakers who hold diverse perspectives.

Bostic cautioned against rushing to reach a neutral level given the existing economic uncertainties, suggesting that a measured approach would be more beneficial. "The range of opinions regarding the future path and the identification of the neutral rate is vibrant and will be interesting to observe," he noted.