Fed official signals openness to more interest-rate cuts this year

Core Viewpoint - The Federal Reserve is facing a divergence in opinions regarding interest rate cuts, with some officials advocating for cuts in response to labor market weaknesses, while others emphasize inflation concerns as a reason to maintain current rates [1][2]. Group 1: Federal Reserve's Stance - Federal Reserve Vice Chair Michelle Bowman suggests that the Fed should be ready to cut interest rates further if the labor market shows signs of weakening [1]. - The current Federal Funds Rate is set between 3.50% and 3.75%, with a total of 75 basis points cut in 2025 [4]. - The Fed's dual mandate requires balancing maximum employment with low inflation, indicating a complex decision-making environment [3][4]. Group 2: Economic Implications - Higher interest rates are associated with lower inflation but can lead to increased job losses, while lower rates can reduce unemployment but may raise inflation [6]. - Economists define the neutral rate, or r-star (r*), as the interest rate that maintains full employment and stable inflation around the Fed's 2% target [5]. - The neutral rate is not fixed and can fluctuate based on various economic factors, including productivity growth and demographic trends [9]. Group 3: Future Projections - The Fed's median projection indicates only one additional 25 basis points cut is expected in 2026 [8]. - The next Federal Open Market Committee (FOMC) meeting is scheduled for January 27-28, with a low probability of a quarter-percentage point cut estimated at 5% [9].