Fed Cleveland President: A pause in rate cuts is the baseline scenario, and the effectiveness of the policy needs to be assessed.

Source: BlockMedia Original Title: Cleveland Fed President Mester “A temporary pause in interest rate cuts is the base scenario” – Bloomberg Original Link: The divergence within the Federal Reserve System regarding the pace of interest rate cuts is increasingly widening. Cleveland Federal Reserve Bank President Loretta Mester stated that pausing interest rate cuts and assessing the effects of the policy is her baseline scenario.

Pause Interest Rate Cut Assessment Policy Effects

Hamek pointed out in a recent media interview that, “Current monetary policy should be temporarily paused to assess the impact of the implemented 75 basis point rate cut on the economy. This is an appropriate level.” She added, “My baseline scenario is that we can maintain the current level until inflation returns to target or there is clear evidence of a deterioration in employment conditions.”

The Federal Open Market Committee ( FOMC ) cut interest rates at its meeting on the 10th of this month, but this decision saw the most dissenting votes since 2019, with 3 against. The dot plot released after the meeting indicated that 6 members preferred to keep the interest rates unchanged.

Opposing Views on Employment and Prices

The concerns within the Federal Reserve about the slowdown in the labor market are in contrast to the priority of suppressing inflation above the target. Harker stated, “A 75 basis point rate cut could support employment policy objectives,” but also emphasized that “restoring inflation to target levels is crucial, and we must complete this task.”

Recent economic data shows that the unemployment rate in the United States rose from 4.4% in September to 4.6% in November. At the same time, the core consumer price index, which excludes the volatile food and energy sectors, rose by 2.6% year-on-year in November, marking the lowest level since 2021.

Beware of the risk of price rebound

Hamek commented on the recent price indicators, saying, “The government shutdown has limited sample collection, and there is noise in the data.” She pointed out, “I won't overemphasize a single piece of data,” and stated, “There is ample time to observe broader trends before the next meeting.”

She also pointed out that inflation has remained around 3% over the past year and a half, and the input costs for businesses are still rising. “These signals indicate a risk that prices may rise again,” she said, which is the reason for maintaining caution in policy decisions.