The Federal Reserve is maintaining a policy of keeping rates higher for longer. With inflation cooling, many on Wall Street now think the Fed will start rate cuts as early as May 2024. Former Kansas City Fed President Esther George joins Yahoo Finance to weigh in on the Fed’s policies and the outlook for inflation going forward.
George comments on the potential of the Fed’s next move: “As we’ve seen, coming out of that last FOMC meeting, there was a tremendous response of anticipating rate cuts and I think the caution for me, is that the Fed is not at its 2% target. They are being mindful that they may be able to back off of some of these interest rates once they become fully convinced, but, right now, this is a forecast of inflation continuing to fall.” Watch the video above to find out why George says why it would “serve the Fed well” to keep watching the data.
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Video Transcript
– Investors are rallying around optimism into the year end. Now, Fed officials left interest rates unchanged in the final meeting of 2023, but comments from Chair Jerome Powell fueled confidence in rate cuts to come in the next year. For more on the Fed’s path forward, we’re joined by Esther George, former Federal Reserve Bank of Kansas City CEO and President.
So thank you so much for joining us this morning. I want to ask– I know you’ve recently sat down with us last month, and you talked to us about the Fed potentially having time to pause and kind of assess where things stand. Is that still your view coming out of the latest meeting earlier this month?
ESTHER GEORGE: Yeah. So I think the Fed has been encouraged by the data that they’ve seen coming out over the past few months. Inflation continues to make its downward drift. The economy, the consumer has remained resilient throughout. So I think their pause around further rate increases has served them well in terms of watching how the data has unfolded.
– And a lot of investors are wondering, when is enough data going to be enough? Is anything short of the Fed’s 2% inflation target going to be enough to warrant a pivot?
ESTHER GEORGE: So it’s a great question, and, as we’ve seen coming out of that last FOMC meeting, there was a tremendous response of anticipating rate cuts. And I think the caution, for me, is that the Fed is not at its 2% target. They are being mindful that they may be able to back off of some of these interest rates once they become fully convinced.
But right now, this is a forecast of inflation continuing to fall, and we know historically that a policy that jumps too soon to those rate cuts can be costly later. And so I think it would serve the Fed well just to continue to watch this data before reacting too quickly to believe that it’s achieved victory or certainly even a soft landing.
– And speaking of kind of, I guess, the timing factor, you’ve talked also previously with us about– saying more time is needed for interest rates to work through the economy. How much more time is needed?
ESTHER GEORGE: So when I look historically, it can take some time before those policies work through, sometimes up to two years. We saw that in the [? 2005-06 ?] rate hike cycle where rates paused in 2006, and it was nearly two years before you began to see some of the full effects there. And, of course, at that time period, it was a bad recession that resulted.
So that’s not my forecast here. My point is I think for the Fed to declare victory too soon could also be as dangerous as holding rates too high for too long, and that, of course, will require them to watch and see over the next few months if the data continue to cooperate on inflation.
