(Bloomberg) -- Federal Reserve Governor Lisa Cook said it will likely be appropriate for the central bank to cut interest rates toward a more neutral stance over time, citing inflation progress and a solid labor market.
Cook described the risks to the central bank’s employment and inflation goals as “roughly in balance.” She said she sees the direction of interest rates as downward, but that the “magnitude and timing” of reductions will depend on incoming data and the economic outlook.
“It likely will be appropriate to move the policy rate toward a more neutral stance over time,” Cook said in prepared remarks Wednesday at an event at the University of Virginia in Charlottesville. A neutral policy position is one that neither stimulates nor restricts economic activity.
After lowering interest rates at each of their last two meetings, Fed officials will issue their next policy decision following their gathering Dec. 17-18. Investors have dialed back expectations for another rate reduction at that meeting, given firm inflation data and a string of comments from policymakers arguing the Fed should proceed with future adjustments with caution.
Fed Chair Jerome Powell said last week that the economy is not sending signals that officials need to be in a hurry to reduce rates.
Cook said Wednesday there had been “significant progress” on disinflation, but that elevated core inflation — which strips out the volatile categories of food and energy — “suggests that we have further to go before credibly achieving our inflation target of 2%.”
“Although most price indicators suggest that progress is ongoing, I anticipate bumps along the road,” she said. She said she estimates both overall and core inflation falling to 2.2% next year, with her confidence in continued disinflation further reinforced by a moderation in wage growth.
Labor Market
Meanwhile, Cook described the jobs landscape as solid. The labor market has cooled during 2024, with a decline in job openings and an uptick in unemployment. Regardless, levels of joblessness and layoffs remain low overall.
“The labor market is in a good position — with the supply and demand for workers being roughly in balance — such that it is no longer a source of inflationary pressure in the economy,” Cook said. She added downside risks to employment have “diminished somewhat” recently.
Still, she said national job growth is “perhaps not quite strong enough to keep unemployment at the current low rate.”
Cook also laid out potential scenarios for the Fed’s policy path moving forward. She said if the the labor market and inflation continue to progress in line with her forecasts, it could be appropriate to lower rates “over time until we near the neutral rate of interest.”
“However, if inflation progress slows and the labor market remains solid, I could see a scenario where we pause along the downward path,” she said. “Alternatively, should the labor market weaken in a substantial way, it could be appropriate to ease policy more quickly.”
Fed officials will release fresh projections for the economy and the path for interest rates following their December meeting.
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