On a significant day in the Bahamas, Harker took to the stage to address the current monetary policy stance of the Federal ReserveAfter three rate cuts last year, many in the financial markets have been rife with speculation regarding the Fed's forthcoming actionsHarker emphasized that the current monetary policy remains “restrictive.” Despite implementing cuts, the constraints on the economy endure, suggesting that the Fed is still treading cautiously in balancing the dichotomy of economic stimulation and inflation control.

Harker provided a thorough analysis of the overall condition of the U.S. economyHe noted that economic growth and production continue along a robust pathExamination of macroeconomic data reveals a stable and positive GDP growth rate, with production activities across various sectors progressing steadilyBoth manufacturing output and the expansion of services are demonstrating significant vitality and resilienceConcurrently, the labor market shows balance, with unemployment holding steady at reasonable levels

Advertisements

Supply and demand for labor appear well-matched, avoiding mass unemployment or labor shortages, thus laying down a solid human resource foundation for stable economic operationBased on these positive factors, Harker firmly believes, “These factors are sufficient to support our decision to keep policy rates unchanged.” While he did not commit to a specific duration for maintaining rates, his optimistic tone was unmistakable as he expressed confidence that inflation will continue its downward trajectory, eventually allowing for a gradual reduction of policy rates over the long term.

Reflecting on the decision made in January, the Federal Reserve officials opted to hold interest rates steadyThis decision was not made in isolation, as it was based on the foundational forecast of a one percentage point reduction in benchmark rates by the end of 2024. In 2024, the Federal Reserve experienced a pivotal shift in monetary policyAfter 11 consecutive rate hikes over more than two years, they commenced substantial cuts in September, thus entering a new policy cycleFollowing this, there were further cuts of 25 basis points in both November and December, leading to a gradual decline in the benchmark rateThe choice to hold rates steady in January signals the Fed's entrance into an observation phase regarding policy adjustments.

Last week, Fed Chair Powell emphasized during his testimony to Congress that after last year’s rate cuts, the Fed does not feel pressured to rush into further rate reductionsPolicymakers are now fixating on inflation data, hoping to witness a noticeable decline in inflation ratesAlthough there is a trend of easing inflation in the United States, some stickiness remains

Advertisements

From the price data, the Consumer Price Index (CPI) for November saw a year-on-year increase of 2.7%, up 0.3 percentage points month-on-month; the core CPI remained unchanged at a 3.3% year-on-year increaseThe personal consumption expenditures (PCE) growth for October recorded a year-on-year rise of 2.8%, an increase of 0.1% compared to September’s preliminary figures, while the core PCE index reached 2.8% over three months, reflecting stagnation in the overall inflation declineFurthermore, policymakers expressed the need for additional time to thoroughly assess the economic policies that the new administration is poised to implementAfter all, the economic policies by the new administration may touch on various fronts, including fiscal spending, tax adjustments, and industry support, and their implementation could have profound implications for the macro economy, consequently influencing the Federal Reserve's future monetary policy direction.

Harker exhibited particular concern for the CPI inflation data from January, expressing a cautious stanceThe CPI figures for that month were notable, marking the largest increase since August 2023, with costs for essential household expenditures like food, fuel, and housing rising across the boardThe uptick in food prices may correlate with agricultural supply issues, climate changes, and global trade dynamics; fuel prices are susceptible to fluctuations in global oil markets and geopolitical developments; while heightened housing costs might stem from supply-demand mismatches in the real estate market and construction material pricingThe changes in this data have stirred nerves in the market, igniting widespread concern regarding a potential inflation resurgenceHowever, Harker offered his unique insight: “Over the past decade, the January CPI inflation data has exceeded expectations nine times

Advertisements

Advertisements

Advertisements