Fed official urges caution on early rate cuts

A senior Federal Reserve official warned against premature interest-rate cuts in prepared remarks and during a public appearance, citing persistent inflation and risks to employment if policy is loosened too soon.

The official said inflation has moderated from recent highs but remains above the Fed’s 2% objective on key measures. Labor-market conditions, the official added, are still tight enough to sustain upward pressure on wages and prices. Cutting rates too early could allow inflation to reaccelerate and require sharper tightening later, the official said, raising the chance of job losses.

The speaker highlighted the Fed’s dual mandate of price stability and maximum employment and said the two goals are linked in the cycle. Policymakers need durable signs that inflation is on a sustained downward path before easing policy, the official said, noting that monetary policy works with long and variable lags and premature easing would complicate the return to stable prices.

Officials will watch specific indicators, the official said, including core inflation excluding food and energy, measures of services inflation that reflect wage trends, and labor-market data such as hiring, quits and wage growth. Only when those data show consistent improvement toward target and inflation expectations remain well-anchored should officials consider lowering the policy rate, the official said, adding that market bets on early cuts may be optimistic.

Financial markets have priced in the possibility of rate cuts next year if inflation continues to fall. The official sought to temper those expectations, warning that easing too soon could undercut progress and force a more abrupt response later, with potentially higher unemployment as firms face renewed price pressures.

The official said future decisions will be data-driven rather than calendar-driven and noted that cumulative tightening since 2022 has slowed demand and eased some inflationary pressures. Communication and credibility remain tools for shaping expectations and minimizing market surprises, the official added.

Critics argue that holding rates high for longer could weigh on growth and eventually weaken the labor market. The official responded that the objective is to avoid a cycle in which early rate relief leads to a return of elevated inflation and then requires a harsher contraction. The official warned, “Lowering rates before we see clear, sustained evidence of disinflation risks undoing hard-won progress and could ultimately harm employment.”

Background: The Fed raised rates aggressively since 2022 to combat high inflation. Inflation has fallen from peak levels but remains above target in several core measures. Policymakers have said future moves will depend on incoming data, particularly price readings and labor-market indicators, and the timing of cuts remains a subject of debate among officials.