The Federal Reserve kept interest rates unchanged at 4.25% to 4.5% last month, indicating that it needs more time to wait for further changes in inflation and observe how US President Trump's tariff policies will impact the economy.
Fed Officials Estimate Two Rate Cuts This Year
Against this backdrop, Atlanta Fed President Raphael Bostic said today that the Fed should keep rates at current levels and continue to exert downward pressure on inflation:
We need to hold the line. You could say we're achieving our employment mission, now we have to get the price stability mission under control, and we need to take a restrictive posture.
Bostic expects two rate cuts this year, but with the backdrop of widespread uncertainty, there could be more or fewer cuts to ensure inflation does not suddenly explode. His overall inflation outlook is a bumpy downward trajectory, with inflation heading towards the 2% target, but not yet reached. The Fed's goal is to reach the 2% target without harming the labor market.
In Bostic's view, businesses are optimistic about deregulation but concerned about the impact of changes in tariff and immigration policies. He sees signs of labor market easing, and the current benchmark rate is moderately restrictive and needs to be maintained. With impending policy changes, economic slowdown is a major concern, but businesses expect solid growth in 2025.
Tariff and Policy Impacts on Rate Cut Decisions
Bostic said last week that monetary policy is in a good place, but officials must remain vigilant as policy uncertainty intensifies, which could impact the labor market and inflation. He mentioned potential changes in trade, immigration, energy, and fiscal policies, stating that there is still a lot of high uncertainty around key factors:
There's a pretty good chance that my outlook today will be different from my outlook six months from now.
In Bostic's view, the Fed still has room to cut rates, as it has not reached a "neutral level" where rates neither stimulate nor restrain the economy. The current rates are in the moderately restrictive range, with a neutral rate estimated to be between 3% and 3.5%.
Given that some of Trump's policies may push up inflation, while others like taxes and regulations may promote investment, Bostic believes it is appropriate to pause rate cuts and observe the economic trajectory.
Market Expects Rate Cuts to Resume in June
The CME FedWatch tool shows that the interest rate market expects the Fed to resume rate cuts in June and potentially cut rates again in September, betting on two more rate cuts this year.
BofA Estimates Fed Rates Frozen for Two Years
However, Wall Street and Fed officials seem to have divergent views. Bank of America CEO Brian Moynihan said this week that it will take years to eliminate inflation, and he predicted the Fed will need to keep rates unchanged until 2026 to fully address the inflation problem.
If Moynihan's view is correct, that may not be good news for the global risk investment market. But we also know that these managers' views often change, so we'll have to wait for more economic data to make a judgment.
