Early US interest rate cuts? Not so fast, Fed officials say

Ahead of their self-imposed blackout, US central bankers throw a damper on market expectations

The Federal Reserve is expect to leave US interest rates unchanged at the conclusion of its January 30-31 meeting. Reuters

Officials at the US Federal Reserve are warning markets not to get carried away about the prospect of cutting interest rates early, suggesting that premature rate cuts would undo much of the progress the monetary authority has made in taming inflation.

Projections released after the Fed's December meeting forecast three rate cuts this year, to bring interest rates down from 5.4 per cent to the target range of 4.75 and 5.0 per cent. The timing on when this might happen is unclear, December's minutes showed.

But markets have remained bullish that rate cuts could come within the first quarter this year. Even a hotter-than-expected inflation report did little to dent market optimism that the Fed would begin cutting rates as soon as March.

A chorus of warnings from numerous Fed officials has mostly tempered market expectations. Today, roughly 52 per cent of traders expect a March rate cut, down from nearly 77 per cent last week.

Fed officials have been sounding the warnings before their self-imposed blackout before their first policy meeting of the year.

Their general message: Don't expect rate cuts anytime soon.

“I see no reason to move as quickly or cut as rapidly as in the past,” said Federal Reserve Governor Christopher Waller during a Brookings Institution event this week.

John Williams, who heads the Federal Reserve Bank in New York, has said the Fed will need to hold a restrictive stance for “some time” until the central bank is “confident that inflation is moving towards 2 per cent on a sustained basis”.

Inflation has climbed down considerably since the Fed began its tightening cycle last year. And with high interest rates not causing mass layoffs, it has given room to believe the Fed will achieve a soft landing.

But last week's Consumer Price Index (CPI) showed that prices rose 3.4 per cent on an annual level in December, slightly higher than in November. Mr Waller said he would be closely looking at CPI revisions due next month.

Federal Reserve Bank of Cleveland President Loretta Mester, meanwhile, told Bloomberg TV she needs to see “some more evidence” on the inflation path for believing that March is too soon to cut rates.

Even one of the more dovish members of the Federal Open Market Committee, Atlanta Fed President Raphael Bostic, doesn't foresee rate cuts coming until the third quarter.

Cutting rates prematurely, he said, could undo much of the progress the Fed has made.

“In such an unpredictable environment, it would be unwise to lock in an emphatic approach to monetary policy,” he said during an event in Atlanta on Thursday.

The Fed officials, all voting members of the FOMC this year, caveated their outlooks on the basis that their decisions will be determined by incoming data.

The Fed next meets on January 30-31, when it is expected to hold interest rates steady at 5.4 per cent.