The Fed – cautious or bold?
The Federal Reserve is expected to cut key interest rates again for the first time next week.
Commerzbank Economic Research
September 13 2024
"Data requires action"
In a recent speech , Governor Waller expressed the view that the time has come for the Fed to act following the latest data:
- The inflation rate, as measured by the deflator of consumption expenditures excluding food and energy, has fallen by 3 percentage points since its high at the beginning of 2022 to 2.6% most recently. It is likely to fall further in the coming months. Finally, wage growth, which is decisive for service prices, has also slowed noticeably. In spring 2025, core inflation is likely to be only slightly above the Fed's target of 2%.
- At the same time, the labor market is showing increasing signs of weakness. In the three months to August, the number of people in employment rose by an average of just 116 thousand, compared with growth of more than 200 thousand at the start of the year. The unemployment rate has risen from 3.4% in April 2023 to 4.2% recently.
From the Fed's perspective, the assessment of the risks to the two parts of its mandate – price stability and maximum employment – has therefore shifted significantly: the central bank now sees higher risks to the employment part of its mandate, having long focused on high inflation. The Federal Reserve sees monetary policy as risk management, which is why it generally focuses on the part of its mandate that is more at risk in any given situation. Fed Chairman Powell made this shift in priorities clear by emphasizing that it is no longer aiming for a further weakening of the labor market.
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