Fed execs indicate January rate pause

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NEW YORK — Kansas City Federal Reserve President Jeff Schmid signaled on Thursday a reluctance to cut interest rates again as the US central bank comes into the new year facing a resilient economy and inflation that remains above its 2-percent target.

“We are currently pretty close to meeting our dual mandate of price stability and full employment” and, “with inflation close to target and growth showing continued momentum, I believe we are near the point where the economy needs neither restriction nor support and that policy should be neutral,” Schmid said in the text of a speech to be delivered before the Economic Club of Kansas City.

In the current environment, “interest rates might be very close to their longer-run level now,” Schmid said. “I am in favor of adjusting policy gradually going forward and only in response to a sustained change in the tone of the data,” he said, adding that “the strength of the economy allows us to be patient.”

The Fed last month cut its benchmark overnight interest rate by a quarter of a percentage point to the 4.25- to 4.50-percent range and signaled expectations of fewer rate cuts in 2025 than had been projected three months earlier.

Fed officials also penciled in expectations of higher inflation, and in public comments and the release of minutes from the Dec. 17-18 meeting they have flagged considerable uncertainty around the outlook.

Philadelphia Federal Reserve President Patrick Harker, meanwhile, also said on Thursday that he still expected the US central bank to cut interest rates, but added that any sort of imminent move down isn’t needed amid considerable uncertainty over the economic outlook.

“I still see us on a downward policy rate path,” Harker said in a speech to the National Association of Corporate Directors New Jersey Chapter’s Economic Forecast 2025.

“Looking at everything before me now, I am not about to walk off this path or turn around,” he said, adding that “the exact speed I continue to go along this path will be fully dependent upon the incoming data.”

The remarks were Harker’s first since last month’s policy meeting when the Fed cut its benchmark overnight interest rate and trimmed the number of expected rate cuts for 2025, amid forecasts that see higher levels of inflation.

Harker does not have a vote on the central bank’s rate-setting Federal Open Market Committee this year and faces mandatory retirement due to Fed rules. He appeared to oppose any prospect of a rate cut at the central bank’s Jan. 28-29 meeting.

“It’s appropriate for us to take a bit of a pause right now and see how things shake out,” Harker said. “We’re not talking about a long pause potentially, but let’s see how things shake out. There’s a lot of uncertainty,” he noted.

Schmid on Thursday was upbeat on where the economy now stands.

“I am optimistic about employment and the strength of the economy,” he said, adding “though the job market has loosened, it remains healthy.” Schmid also said growth has been “solid” around the 3-percent level.

The Kansas City Fed chief weighed in on the central bank balance sheet drawdown known as quantitative tightening, or QT, which has seen the Fed reduce its holdings from a peak of about $9 trillion in 2022 to just under $7 trillion. The Fed expects to reduce its holdings further but is unsure how far it can take the process.

“I would like to see even further declines this year,” Schmid said of the balance sheet, adding that he would also like to see the Fed move toward an all-Treasuries profile.

“We should minimize our impact on relative asset prices,” he said, noting “this means moving out of mortgage-backed Securities.”

In his remarks, meanwhile, Harker said “the overall underpinnings of our economy remain strong.”

But even so, he said “we remain in very unsettled times” that limit providing guidance about what lies ahead on the policy path. “In an uncertain world, policy needs to remain data-dependent and best positioned to deal with the risks ahead.”

He also said “the underpinnings of our macro economy remain strong” and that while inflation remains higher than desired, the Fed has had success in lowering price pressures. But Harker noted that getting inflation back to the central bank’s 2-percent target was taking longer than expected.

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