Fed Interest Rate Cuts Still Possible as Economy Assessed

Atlanta Federal Reserve President Raphael Bostic indicates that the Fed remains open to interest rate cuts this year, depending on the evolving economic landscape and the impact of new policies from the Trump administration.

Inflation Remains a Concern

Bostic emphasized the importance of assessing recent inflation data, noting that core CPI price increases for January exceeded expectations and marked the largest monthly rise since April 2023. He stated that the Fed is carefully monitoring these trends to determine if they represent a sustained trend or a temporary deviation.

Easing Cycle Moderation

Bostic downplayed concerns that the Fed has already cut rates too aggressively, maintaining that the policy rate remains restrictive. He believes the cuts made in 2024 were necessary to bring inflation down.

Impact of Trump Administration Policies

Bostic expressed uncertainty about the potential impact of new tariffs, tax cuts, and deregulation moves from the Trump administration on inflation. He highlighted conflicting views among businesses, with some predicting inflationary effects and others anticipating increased investment and productivity.

Consumer Concerns

Bostic noted that consumers are more sensitive to rising prices, potentially limiting businesses' ability to absorb increased costs caused by tariffs. He suggested that the situation is different from 2017, when inflation was lower and consumers had more flexibility to tolerate price increases.

Fed Minutes Align with Cautious Stance

Minutes from the Fed's last meeting echoed Bostic's cautious approach, emphasizing concerns about inflation and potential policy changes from the new administration.

Balance Sheet Reduction Considerations

Regarding the reduction of the Fed's balance sheet, Bostic believes the central bank is approaching a level where further reductions could impact money market fund volatility. He suggested a more cautious approach in the future, potentially considering slowing or pausing the runoff if any issues arise related to raising the debt ceiling.