(Bloomberg) -- Several Federal Reserve officials Wednesday reiterated their deep uncertainty over how far the central bank will need to lower interest rates, highlighting the difficulty policymakers face in trying to determine the right setting to keep the economy on an even keel.
“While now is the time to begin dialing back the restrictiveness of monetary policy, it remains to be seen how much further interest rates will decline or where they might eventually settle,” Kansas City Fed President Jeff Schmid said in a speech at an energy conference co-hosted by the Kansas City and Dallas reserve banks.
Remarks like Schmid’s are becoming a regular refrain for Fed officials. Many have said they believe the neutral rate — the level where rates neither fuel nor dampen economic growth — has likely risen since the pandemic. But none has expressed confidence over where it lies.
“Importantly, uncertainty about the neutral rate has also risen, perhaps because the structural changes in the economy are relatively recent and will take time to fully assess,” Schmid’s counterpart in Dallas, Lorie Logan, said in separate remarks at the same conference.
The uncertainty is weighing heavily on Fed officials, because overshooting the neutral level would risk reigniting inflation. That will likely make them proceed with greater caution and possibly introduce pauses into their rate-cutting cycle.
Logan said “widely consulted models” put the neutral federal funds rate anywhere from 2.74% to 4.6%. The mid-point of the Fed’s policy rate is currently right at the top end of that range.
She added that she believed more rate cuts were on the way but the Fed should “proceed cautiously at this point.”
Following a report showing October inflation was largely in line with economists’ expectations, Wednesday’s Fed speakers also generally expressed confidence inflation remained on a downward path toward the central bank’s 2% target.
“Right now, I think that inflation is headed in the right direction. I’ve got confidence about that, but we need to wait,” Minneapolis Fed President Neel Kashkari said in an interview with Bloomberg Television. “We’ve got another month or six weeks of data to analyze before we make any decisions.”
Kashkari said Tuesday an upside surprise in inflation data between now and the Fed’s December meeting could give him pause in supporting another quarter point cut in rates. The Fed lowered their benchmark in September by a half point and again this month by a quarter point.
Wednesday’s consumer price data showed the so-called core CPI index — which excludes food and energy costs — increased 0.3% for a third month. The overall CPI advanced 2.6% from a year earlier, marking the first acceleration on an annual basis since March.
Following the new data, investors moderately increased bets on another rate reduction at the Fed’s December meeting.
Speaking in Memphis, St. Louis Fed President Alberto Musalem said the central bank is within sight of its inflation and employment goals, but he emphasized officials should keep policy “moderately restrictive” while price growth remains above the Fed’s 2% target.
“In my baseline scenario, based on current information, I expect inflation to converge toward 2% over the medium term,” he said, but added that officials should “judiciously and patiently” evaluate incoming economic data when considering further rate cuts, he said.
In a question-and-answer session following his speech, Musalem said recent information suggested the risk inflation could stall on its downward path, or even move higher, has risen. He said the data suggested the economy is “stronger, perhaps materially stronger than it had been” and that several measures of inflation had come in “a little higher.” Still, he said, the central bank’s policy is well-positioned.
--With assistance from Craig Torres.
(Updates with comments from other Fed officials.)
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