Fed officials offer contrasting views on US inflation and interest rate path

December's interest rate decision seen as less of a certainty following strong economic data and Fed remarks

The Federal Reserve building in Washington, US. Reuters

Federal Reserve officials on Wednesday offered differing perspectives on the state of US inflation, as the prospect of a December interest rate cut grows more uncertain.

The Fed has cut interest rates by a total of 75 basis points in its previous two meetings, bringing down its target range to 4.50-4.75 per cent. An additional 25-basis-point cut was seen as a lock a week ago, but stronger-than-expected data and recent comments from officials have led investors to pare back their expectations.

Roughly 54 per cent of traders expect a 25-basis-point cut next month, compared to 82.5 per cent last week.

Fed Governor Michelle Bowman, a permanent voting member on the central bank's policy-setting committee, said she believes that “stalled” progress in taming inflation dictates a more cautious approach in cutting rates.

“I would prefer to proceed cautiously in bringing the policy rate down to better assess how far we are from the end point,” she said in West Palm Beach, Florida.

In contrast, her fellow Fed Governor Lisa Cook, also a permanent voting member, said she sees continued downwards momentum in inflation as a reason to push through with reducing policy.

“Going forward, I still see the direction of the appropriate policy rate path to be downward,” Ms Cook said at the University of Virginia in Charlottesville.

The contrasting perspectives offer a snapshot into the current thinking of the Federal Reserve, with officials coming to a delicate phase in the easing cycle. Cutting interest rates too soon could rekindle inflation, while leaving them elevated for too long could send the world's most significant economy into a downturn.

All 12 members of the policy-setting Federal Open Market Committee voted in favour of the most recent interest rate cut in November.

But the path forward is less certain.

The Consumer Price Index rose to 2.6 per cent on an annual basis last month, remaining stubbornly above the Fed's long-term 2 per cent target. And despite weak payroll gains attributed to a Boeing strike and natural disasters, the unemployment rate was unchanged at a still-low 4.1 per cent.

At the same time, the nation's economy grew at a solid 2.8 per cent in the third quarter.

Fed officials generally consider their dual risks – price stability and maximum employment – to be relatively in balance, although Ms Bowman remains the outlier in seeing a greater risk to the inflation side.

“I see greater risks to the price stability side of our mandate, especially while the labour market remains near full employment,” she said.

Separately, Boston Fed Governor Lisa Cook joined the dovish side of the argument in remarks at the University of Michigan's Ford School.

Ms Collins, who will be a voting member on the FOMC next year, said she is encouraged by the inflation picture and expects “additional adjustments will likely be appropriate over time”.

Wednesday's round of comments come a week after Fed Chair Jerome Powell pushed back on market expectations of forthcoming rate cuts. Most traders expect the Fed to skip a rate cut in January.

“The economy is not sending any signals that we need to be in a hurry to lower rates,” he said in Dallas.

Also clouding the outlook is the incoming presidency of Donald Trump, who campaigned on pledges to issue across-the-board tariffs and a mass deportation of migrants. Most economists argue such policies would hamper the Fed's inflation fight and restrict economic growth.