Three Fed members poured cold water on rate cuts: room for further action is limited

Author: Li Dan, Wall Street Journal

Caution within the Federal Reserve regarding further rate cuts is emerging. Recent comments from two Fed officials suggest they believe there is limited room for further easing, casting a cold spotlight on the prospect of further action this year following last week's rate cut.

St. Louis Fed President Alberto Musalem, who holds a vote at this year's FOMC meeting, said on Monday that he supported last week's rate cut but expects limited room for further easing unless policy becomes excessively loose.

Atlanta Fed President Raphael Bostic, who will hold a vote on the FOMC until 2027, also said on the same day that he currently sees no reason to cut rates further this year due to concerns about inflation. Subsequently, Cleveland Fed President Beth Hammack, who will have a vote at the 2026 FOMC meeting, also expressed concerns about inflation, stating that she is very concerned about inflation and that easing policy with caution is necessary to avoid overheating the economy. The shared views of the three officials reflect the Fed's continued focus on inflation risks. While labor market risks have increased, persistently above-target inflation remains a primary concern for these policymakers. This stance may influence the Fed's interest rate policy direction at its remaining two meetings this year. Last week, the Federal Reserve decided to cut interest rates by 25 basis points, the first rate cut of the year. Only one FOMC voting member, new Fed Governor Milan, who advocated for a 50 basis point cut, dissented. The dot plot released after the meeting showed that seven of the 19 Fed policymakers predicted no further rate cuts this year, while 10 predicted at least a combined 50 basis point cut, meaning two more cuts of at least 25 basis points. At a press conference after the meeting, Federal Reserve Chairman Powell stated that declining employment has become a material risk; this rate cut was a risk-management measure; the 50 basis point rate cut did not enjoy broad support; and the extremely rare economic situation has led to wide divergence in the Fed's rate forecasts. Musallem: Further rate cuts are premised on the absence of increased inflation risks. St. Louis Fed President Musallem elaborated on his policy stance in a speech at the Brookings Institution. He described last week's rate cut as a "precautionary measure aimed at supporting a fully employed labor market and preventing further weakness." Mousallem said: "The monetary policy stance is now between moderately restrictive and neutral, which I believe is appropriate. However, without over-easing policy, there is limited room for further easing, and we should proceed with caution (in cutting interest rates). "Musallem stressed that although downside risks in the labor market have increased, he remains concerned that inflation may persist above the Fed's 2% target. He pointed out that the booming stock market and low credit spreads continue to support the economy, and policymakers should act with caution in this context. He said: "If there are signs of further labor market weakness, I would support further reductions in the policy rate, provided that the risks of persistently above-target inflation have not increased and longer-term inflation expectations remain stable." Bostic: Concerned about long-term excessive inflation, does not believe the job market is currently in crisis. Atlanta Fed President Bostic expressed similar caution in a media interview on Monday. According to the media report, Bostic only expected one rate cut this year in his economic forecast at last week's meeting, which means he does not expect a rate cut in the remaining two meetings this year. He said

"I'm worried that inflation has been too high for a long time. So I wouldn't support a rate cut today, but we'll see what happens."

Bostic expects core inflation in the United States to rise to 3.1% by the end of the year from 2.9% in July, and the unemployment rate to rise slightly to 4.5%. He said he did not expect inflation to fall back to the Fed's target of 2% before 2028.

Bostic believes that the risks of weak employment and rising inflation are more balanced, but he stressed that

"do not think the labor market is in crisis right now," and "how weak it is is still an open question." ”

Bostic attributed about a third of the recent slowdown in hiring to labor supply constraints. He expects those supply pressures to intensify because of the roughly one-year lag between immigration and obtaining a work permit. “The supply challenges are going to get more severe. ”

Hamack: Very worried about inflation, should be cautious in easing to avoid overheating of the economy

Hammack said she remains highly concerned about inflation and believes Federal Reserve officials should be cautious when considering cutting interest rates to avoid overheating the economy.

Hammack pointed out that despite the recent slowdown in job growth, the U.S. labor market remains strong, as reflected in, for example, low layoffs and low unemployment. She also said that inflation has been above the Fed's 2% target for four consecutive years and it may still be difficult to return to that target in the next few years. She said:

"I think we should be very cautious in easing monetary policy constraints," Hamack said at a seminar held by the Federal Reserve Bank of Cleveland on Monday. "I am worried that if we ease monetary policy constraints, the economy may overheat again. "

Hammack said that after the Fed's interest rate cut last week, monetary policy is now only "slightly" restrictive, and interest rates are not far from a neutral level that neither stimulates nor suppresses economic growth. "I think the current employment situation is still good, but I am very worried about inflation."

Tariffs and inflation outlook remain uncertain

Both officials mentioned the potential impact of tariffs on inflation. Mousallem said that while the impact of tariffs on prices has so far been less than expected, other factors appear to be pushing up inflation. He expects the price effect of tariffs to dissipate in the next two to three quarters, but Fed officials need to be vigilant to the threat of second-round effects and persistent inflation.

Whether inflation persists above target because of the impact of tariffs, slowing labor supply growth or other reasons, monetary policy should continue to combat this persistence, Mousallem said. Bostic noted that tariff-driven cost increases have been milder than initially forecast, in part because businesses have used various strategies to spread or delay the transmission of costs to consumers. But these buffers may be exhausted in the coming months, and the economy may avoid significant immediate price increases but face more prolonged periods of moderate price pressures.