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Federal Reserve's Shift in Monetary Policy: What You Need to Know
In a recent appearance on CNBC's 'Squawk Box,' Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, outlined a significant shift in the Federal Reserve's monetary policy stance. Here are the key points that make this development particularly noteworthy.
Progress in Inflation Control
Kashkari emphasized that the U.S. has made substantial progress in bringing inflation back down towards the Fed's 2% target. After a brief increase in the first quarter, inflation has continued to fall, indicating that the disinflationary process is on track. This progress is evident in both headline and core inflation metrics, with the latter being a more reliable predictor of future inflation trends due to its exclusion of volatile food and energy prices.
Labor Market Softening
The labor market, while still robust with an unemployment rate of 4.2%, has shown signs of softening. This shift in labor market indicators has led Kashkari to conclude that the balance of risks has moved away from higher inflation and towards the risk of higher unemployment. This assessment was a crucial factor in his support for the recent 50 basis point cut in the federal funds rate.
Rate Cut and Future Policy
The Federal Reserve's decision to lower the target range for the federal funds rate by 50 basis points to 4.75%-5.00% was seen as a significant move, especially given that it was larger than many analysts had anticipated. Kashkari believes this cut was necessary to address the softening labor market and to ensure the Fed remains on track to achieve its dual mandate of maximum employment and price stability. He also forecasts potential further rate cuts, suggesting another 50 basis point reduction could occur in the Fed's last two meetings of the year, which would bring the policy rate down to around 3.4% by next year.
Economic Resilience
Despite the softening labor market, consumer spending and economic growth have shown unexpected resilience. This mixed bag of data does not indicate the emergence of recessionary pressures but rather a complex economic landscape. Kashkari noted that while the overall monetary policy remains tight, the data suggests a continuation of inflation moderation and economic resilience is the most likely scenario moving forward.
Implications for the Future
Kashkari's forecast places the policy rate just half a percentage point above what he considers the "neutral" rate, where borrowing costs neither stimulate nor hinder economic growth. However, he stressed that the actual trajectory of interest rates will depend on forthcoming economic data, including activity, labor market conditions, and inflation metrics. This cautious approach reflects the Fed's commitment to data-driven decision-making in navigating the current economic environment.
In summary, the Federal Reserve's recent rate cut and the anticipated slower pace of future rate adjustments reflect a nuanced response to the evolving economic landscape. With inflation on a downward trend and labor market indicators softening, the Fed is carefully balancing its dual mandate to ensure sustained economic health.
Original Article: https://www.cnbc.com/2024/09/23/minneapolis-fed-president-kashkari-sees-slower-pace-of-rate-cuts-ahead.html
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