The Federal Reserve must tread carefully with any adjustments to its monetary policy due to ongoing risks to inflation, as highlighted by two officials on Wednesday. On Thursday, the central bank's Federal Open Market Committee (FOMC) reduced its benchmark lending rate by 25 basis points, following a significant 50-basis-point cut in September.
While inflation has made strides towards the target of 2%, it is still described as 'somewhat elevated' by the committee. Dallas Fed President Lorie Logan indicated that further rate reductions are likely, although predicting the timing and frequency of these cuts is challenging. This difficulty arises from inflationary pressures driven by strong demand and supply disturbances.
Logan, who will not be voting on the FOMC until 2026, remarked that the challenges to monetary policy include unexpectedly robust demand or supply shocks that could keep inflation rates above the targeted level. She noted, 'Tightening financial conditions could trigger a rapid deterioration in the labor market.' A significant concern is that financial conditions may 'ease too much' if the neutral interest rate turns out to be higher than anticipated.
Logan commented on the current state of US economic activity, labeling it as resilient, while noting that the labor market is 'cooling gradually, not weakening materially.' She warned that if rates are cut excessively, inflation could accelerate again, forcing the FOMC to reverse its course. 'In these uncertain but potentially very shallow waters, I believe it's best to proceed with caution,' she stated. On the same day, official data revealed that US consumer inflation aligned with Wall Street predictions for October, further fueling expectations of a subsequent quarter-point interest rate reduction by the FOMC next month.
St. Louis Fed President Alberto Musalem shared insights suggesting that recent data points to an increased risk of inflation not retreating to 2% or potentially rising. Additionally, he indicated that the risk of an 'unwelcome deterioration' in the labor market has either remained stable or may have declined. 'Further easing toward a neutral policy stance will be appropriate to support employment if inflation continues to converge toward 2%,' Musalem stated.
He suggested that given the current economic conditions and the balance of risks, the FOMC can carefully assess incoming information while contemplating additional policy rate reductions. Musalem pointed out that over the past year, the labor market has cooled and currently seems to exert less inflationary pressure than in the past.
He serves as an alternate member of the FOMC, which allows him to vote if a scheduled voter cannot attend. 'We may well be at the final mile on the journey to price stability, and I believe the economy will reach its destination with appropriate monetary policy,' he concluded. 'There is more work to do.'.