Fed Officials Support Initial 50bps Cut, Kashkari Sees Another 50bps This Year

Minneapolis Federal Reserve President Kashkari stated in an article that he supports another 50 basis points rate cut this year and detailed his support for the Federal Reserve's substantial rate cut last week.

In the article published on the Fed's website on Monday, Kashkari pointed out that he supports the decision to cut rates by 50 basis points last week, as inflation has noticeably cooled, approaching the Federal Reserve's 2% target. At the same time, there are signs of weakness emerging in the labor market.

"The balance of risks has shifted from high inflation to the risk of further weakening of the labor market, so there is reason to lower the federal funds rate," Kashkari said.

Before these officials made the above remarks, Federal Reserve policymakers decided last week to cut rates by 50 basis points, marking a proactive start to their shift from fighting inflation to boosting the job market. The dot plot from last week also showed that the median forecast of Federal Reserve officials is to cut rates by another 50 basis points in the remaining two meetings this year.

Although Kashkari does not have voting rights in this year's Federal Open Market Committee, he participates in the deliberation of monetary policy.

Since 2022, Kashkari has published a series of articles when the Federal Reserve began actively tightening policy to reduce inflation. Notably, Kashkari still indicated in his last such article in May that policymakers might maintain interest rates unchanged for "a considerable period" until they are certain that inflation is moving towards the target.

Views of Other Officials

Hawkish voter and Atlanta Federal Reserve President Bostic also agreed with the 50 basis points rate cut last week in a speech on Monday. He said that as the risks between inflation and employment become more balanced, starting the central bank's rate-cutting cycle with a substantial rate cut will help bring interest rates closer to a neutral level.

Also supporting the substantial rate cut at last week's meeting was Federal Reserve Governor Waller, who said on September 20th that he supported a 50 basis points rate cut due to the unexpectedly favorable inflation data in recent weeks.

However, this contrasts sharply with Federal Reserve Governor Bowman, who said last Friday that she voted against the decision because she remains concerned about inflation being higher than the target. This opposition also made her the first Federal Reserve governor to vote against a Federal Reserve interest rate decision since 2005.Additionally, Bostic added that, given the uncertainty surrounding the so-called neutral interest rate (the level of interest rates that neither stimulates nor inhibits economic activity) and concerns about a potential resurgence of inflation, officials should not commit to a pace of large-scale interest rate hikes.

"The concerns about inflation may have led me to decide on a relatively small initial rate cut last week—such as 25 basis points," Bostic said in remarks prepared for an event organized by the European Economic and Financial Center on Monday, "but such a move would mask the increasing uncertainty in the trajectory of labor market developments."

Kashkari also believes that, despite uncertainties about the underlying strength of the U.S. economy, economic growth and consumer spending remain robust. He stated that the neutral interest rate may have risen.

"The longer this economic resilience lasts, the more signals I receive suggesting that the temporary rise in the neutral interest rate may actually be more structural," Kashkari wrote.

Currently, Kashkari expects the long-term federal funds rate to be around 2.9%, higher than the 2.5% he forecasted in March. At last week's meeting, the median estimate of this rate by all Federal Reserve officials also rose from 2.5% a year ago to 2.9%.