Fed Leaders Stress the Importance of Flexibility in Monetary Policy 

Fed Leaders Stress the Importance of Flexibility in Monetary Policy

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Federal Reserve policymakers continue to expect inflation to decrease this year while maintaining a strong labor market, which leaves them in no hurry to lower the policy rate from the 5.25%-5.5% range held since last July.

Dallas Fed President Lorie Logan expressed concerns about potential upward risks to inflation on Thursday. She emphasized the need for the U.S. central bank to remain "flexible" and keep "all options on the table" as it monitors data to determine its response. Logan stated at an event in El Paso, Texas, "It's really important that we don't lock into any particular path for monetary policy. I think it's too soon to really be thinking about rate cuts." Despite inflation running closer to 3% than 2% this year, she believes, "I think there's good reasons to think that we're headed to 2% - we're still on that path, perhaps a bit slower and a little bit bumpier than maybe many thought at the beginning of the year."

No Immediate Plans for Rate Cuts as Economic Data Remains Key

Earlier on Thursday, New York Fed President John Williams commented that there is "ample evidence" that monetary policy is restrictive and aiding in bringing inflation down to the Fed's 2% target. He added, "At some point, the Fed will get to a place where it can cut rates, but the timing is unclear. I don't feel any urgency to lower rates with the economy performing as well as it has."

Williams, Logan, and their fellow Fed policymakers are scheduled to meet in about two weeks and are expected to keep rates unchanged as they gather more economic data. One significant question, as Chicago Fed President Austan Goolsbee noted in an interview on CNN International, is whether further improvements in inflation will necessitate higher unemployment, considering the reduced aid from improved supply chains and other factors that significantly eased price pressures last year. Goolsbee stated, "What everybody is trying to wrap their head around now ... is are we back to the traditional tradeoff between employment and inflation?"

A government report released on Thursday showed that the U.S. economy grew at a 1.3% annualized rate in the first quarter, slower than previously estimated, as household spending was less than anticipated. Policymakers will get a fresh update on inflation's progress with the Commerce Department's upcoming publication of the monthly U.S. personal consumption expenditures price index. Economists predict a 2.7% increase in April from a year ago; the Fed targets a 2% pace.

Other critical data include the May jobs report, due next Friday. The unemployment rate was 3.9% in April, only slightly above where it was when the Fed began raising interest rates to combat inflation in March 2022. During their June 11-12 policy meeting, Fed officials are expected to revise their previous forecast of three rate cuts this year to align more closely with the one or two rate cuts currently anticipated by financial markets.

In recent months, as inflation remained higher than hoped, Fed officials have largely ceased predicting policy easing this year and have refrained from projecting the timing of potential rate cuts. Atlanta Fed President Raphael Bostic told Fox Business Network on Thursday, "If September is the right time, then it's going to be September. If it's December that's the right time, that's going to be December. If it's February that's the right time, it'll be February. I really will let the data and the information that we have at hand tell me what the right time to move our policy will be."

In New York, when asked about the extent of rate cuts once they begin, Williams replied, "If I don't know when we're going to cut rates, how can I answer that question?"