Fed Officials Say Don’t Bet on Rate Cuts Even If There’s a Recession

The Federal Reserve building in Washington, on March 19, 2019. Leah Millis/Reuters/File Photo

Two senior Federal Reserve officials threw cold water on investor hopes for interest-rate cuts anytime soon as they both expressed concern about stubborn inflation.

Raphael Bostic, president of the Federal Reserve Bank of Atlanta, highlighted the stickiness of inflation, while saying that he doesn’t anticipate any interest-rate cuts this year and, if anything, “we may have to go up.”

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, largely echoed that sentiment, although he struck a more dovish tone, saying that much of the impact from the Fed’s series of rapid rate increases is still in the pipeline. He said he'd need to see more data—in particular around tightening credit conditions—before committing to a bias on the future path of interest rates.

The officials made the remarks in separate interviews with CNBC on the sidelines of the Atlanta Fed’s Financial Markets Conference, which came about a month before the next meeting of the central bank’s interest rate-setting Federal Open Market Committee (FOMC) on June 13–14.

Raphael W. Bostic, president of the Federal Reserve Bank of Atlanta, speaks at a European Financial Forum event in Dublin on Feb. 13, 2019. Clodagh Kilcoyne/Reuters

Investors are betting that the Fed will hold rates steady within the current range of 500 to 525 basis points when the FOMC meets on June 14 to decide on the path of the benchmark federal funds rate.

Futures contracts currently put the odds of a pause at 78.8 percent, per the CME FedWatch Tool, down from 84.5 percent a week ago before the release of the latest inflation data, which showed accelerating price pressures.

However, the Atlanta Fed’s interest rate probability tracker indicates that markets believe the Fed will start to lower rates before the year’s end, going from around 5.0 percent in June to 4.7 percent by September and 4.2 percent by late December.

Bostic said that he doesn’t expect any rate cuts in 2024 because inflation is likely to be stickier than markets believe, while Goolsbee advocated for more of a wait-and-see approach that’s based on incoming data.

“I think we should be extra mindful” of not over-tightening under conditions where the 500 basis points in rate hikes have yet to filter down into the economy, Goolsbee said.

He noted some cooling in the labor market and other metrics amid the fastest pace of Fed rate increases since the 1980s, but not enough to bring inflation down to comfortable levels.

Austan Goolsbee, then-chairman of the Council of Economic Advisers, speaks during an event in Washington, on June 10, 2011. Mark Wilson/Getty Images

‘Increase a Little Further’?

Bostic said on May 15 he doesn’t expect any interest-rate cuts this year because inflation is likely to be stickier than those in markets believe.

“The appropriate policy is really just to wait and see how much the economy slows from the policy actions that we’ve had,” Bostic said, adding that there’s “definitely been” progress on inflation.

The latest Consumer Price Index (CPI) figures showed that inflation in April inched down in annual terms, to 4.9 percent from 5.0 percent, but shot up fourfold in monthly terms, from 0.1 percent to 0.4 percent.

The most recent data on the Producer Price Index (PPI), which reflects business input costs that eventually tend to get passed to consumers, increased by 0.2 percent in April, after falling 0.4 percent in March.

Bostic, who described the year-over-year drop in the CPI measure to 4.9 percent as “encouraging,” said he thinks that the economic winds are going “to work in our favor” over the next several months in terms of not fanning the flames of inflation.

Still, Bostic said that “if there is going to be a bias to action, for me there would be a bias to increase a little further, as opposed to cut.”

At 3.4 percent, the unemployment rate is the lowest it has been in more than 50 years. Even if there’s some increase in the unemployment rate as the Fed maintains its hawkish tilt to bring inflation down closer to its 2 percent target, Bostic said he believes the economy would still be strong.

While recession isn’t his baseline forecast, Bostic said that if one does occur, it will be short and shallow.

“I think it’s not going to be very long, I think it’s not going to be very deep,” he said.

Slowing economic growth in the United States appears increasingly likely to accelerate into a full-blown recession.

The probability that the country will enter a recession within the next year has risen to 68.2 percent, according to the New York Fed. That’s the highest level since 1982.

‘Close Call’

Goolsbee on May 15 reiterated his earlier call for prudence and patience around interest rate decisions, given the current period of heightened uncertainty and financial stress due to the recent bank failures.

“At moments like this, you don’t want to land the plane nose down,” he said, referring to the idea of tightening monetary policy to achieve a so-called soft landing rather than tipping the economy into a recession.

In a speech in April, he called the recent bank sector turmoil sparked by the failures of Silicon Valley Bank and Signature Bank as the “new big hairy elephant in the room” that forced regulators to roll out emergency measures to contain depositor panic and prevent bank runs.

Goolsbee said on May 15 that his decision to back an interest-rate increase at the FOMC policy meeting in May was a “close call” as he weighed the effects of credit tightening from recent bank stresses.

“The thing that made it a close call for me is this big question mark about what is going to be the impact of this on credit conditions,” Goolsbee said, stressing the need to see more economic data before the next meeting in June.

“I don’t think you can say ’this is hike and hold,'” the Chicago Fed chief said, when asked if he’s leaning toward maintaining the current federal funds rate within its current range of 500 to 525 basis points.

He said that much of the impact on the real economy from the rate hikes the Fed has delivered thus far is still to come.

“When you have these big times of uncertainty, let’s be prudent and patient and watch a lot more data than we normally do,” Goolsbee said. “We’ve still got a few weeks before for the next meeting, but [we’re] watching the credit stresses, watching the craziness of the debt ceiling, and watching what’s happening in the labor market, and the prices.”

Still, he acknowledged that despite the Fed’s efforts to engineer a soft landing, a recession isn’t out of the question.

“Inflation is improving, but it’s not improving that rapidly,” he said.

“So we’ve just got a balancing act here,” Goolsbee said, noting that policymakers’ objective is, “to the extent possible,” to bring inflation back to the correct path without triggering a recession.

The remarks by the two Fed officials follow a key University of Michigan survey that showed long-run inflation expectations rising to 3.2 percent, the highest reading since 2011.