The "third in command" at the Federal Reserve speaks up: Advocates for gradual rate cuts to neutral, aiding a win-win for inflation and employment
The "third in command" at the Federal Reserve calls for a gradual rate cut, but what subtleties are hidden behind this statement?
New York Federal Reserve President William's remarks on "gradually lowering rates to neutral" have caused ripples in the otherwise calm financial markets, akin to a pebble being tossed into still waters. On the surface, this appears to be an attempt to soothe the market, suggesting that inflation is under control and a soft economic landing is within reach. However, beyond the surface, there may be much more to it.
Is William's statement merely a dovish signal?
Firstly, we must understand the meaning of "neutral interest rates." It refers to the level of interest rates that neither stimulates nor inhibits economic growth. William's call for a gradual reduction to a neutral level implies that current rates are still too high and need to be further lowered to ensure the economy runs smoothly. This seems to pave the way for rate cuts, but the word "gradual" holds subtle implications. It sends a signal that the Federal Reserve is not in a hurry to make significant rate cuts but intends to proceed cautiously, taking one step at a time.
Advertisement
Secondly, William emphasizes that inflation and employment targets have achieved a better balance. Does this mean that the Federal Reserve has already won the battle against inflation? Not necessarily. September CPI data shows that inflation remains stubborn, with the core CPI year-on-year increase even higher than expected. It's like a protracted tug-of-war; although some phased achievements have been made, it is far from the time to sound the retreat.
So, what is the true intention of the Federal Reserve?
I believe the Federal Reserve is playing a delicate balancing act. On one hand, they want to control inflation and prevent the economy from overheating; on the other hand, they also want to avoid excessive tightening, which could lead to an economic recession. William's speech is a reflection of this balanced strategy. It both appeases market expectations for rate cuts and avoids overpromising, leaving room for future policy adjustments.
Behind this, there are several major concerns for the Federal Reserve:
The capriciousness of inflation:Despite inflation showing some signs of easing, underlying inflationary pressures persist. Factors such as energy price volatility and supply chain disruptions could potentially lead to a resurgence of inflation. The Federal Reserve must be vigilant against these risks.
Risk of Economic Recession:
Aggressive interest rate hikes have already exerted considerable pressure on economic growth. If significant rate increases continue, the risk of an economic recession will further escalate.
Vulnerability of Financial Markets:
A prolonged period of low interest rates has led to the accumulation of substantial risks within financial markets. Rapid interest rate hikes could trigger financial market turmoil and even systemic risks.
How should the Federal Reserve respond to these challenges?
The Federal Reserve needs to adopt a more flexible and pragmatic strategy. It must maintain its commitment to controlling inflation while also adjusting its policies in a timely manner in response to changes in the economic landscape.
Data-Driven Decisions:
The Federal Reserve's decisions should be based on the most recent economic data rather than a predetermined path.
Transparent Communication:
The Federal Reserve should engage in clear and transparent communication to manage expectations and provide guidance on its policy actions and their potential implications for the economy.The Federal Reserve needs to engage in more transparent communication with the market to avoid causing market misjudgment.
International Cooperation:
The global economy faces many challenges, and the Federal Reserve needs to strengthen cooperation with other countries to jointly address them.
Where will interest rates go in the future?
Predicting the future is not an easy task, but we can make some reasonable speculations based on existing information. I believe that for a period in the future, the Federal Reserve may adopt a strategy of small interest rate cuts, gradually adjusting interest rates to a neutral level. However, the pace and magnitude of the rate cuts will depend on the performance of inflation and economic data. If inflation continues to fall and the economy maintains stable growth, the Federal Reserve may accelerate the pace of rate cuts. On the contrary, if inflation rises again, or if there are signs of economic recession, the Federal Reserve may pause rate cuts or even raise rates again.
As a senior economist said: "The Federal Reserve's policy is like walking on a tightrope, needing to maintain balance while constantly moving forward." This game of balance tests the wisdom and courage of the Federal Reserve. And we, as onlookers of this game, also need to keep a clear mind and view market fluctuations rationally.
The American economist Milton Friedman once said: "Inflation is always a monetary phenomenon, no matter when or where." Controlling inflation remains the primary task of the Federal Reserve. And finding the best balance point in this game with inflation will be the biggest challenge the Federal Reserve will face in the future.