US Equities (^GSPC, ^DJI, ^IXIC) are trading higher on Thursday as the market reacts to the Federal Reserve's updated Summary of Economic Projections. The data showed nine members believe three rate cuts will occur by the year's end. Chair Jerome Powell also claimed the Fed is seeking to slow the shrinking of its $7.5 trillion balance sheet.
Former Federal Reserve Bank of Kansas City CEO and President Esther George joins Yahoo Finance to discuss the economic backdrop for the Fed and give insight into how the Fed may shape its policy decisions moving forward.
In terms of what the Fed will be looking for moving forward, George states: "We have seen the goods part of inflation, those things that we buy and set up at our homes, coming down. Housing has proven to be a little stickier than originally thought, and of course services inflation continues to be quite strong. So I think for the Fed, being able to look broadly at those inflation measures and see that it's coming down in general. Right now, it looks pretty uneven in terms of where the disinflation is coming. I suspect that's one of the things they'll want to see is this services inflation beginning to cool more."
RACHELLE AKUFFO: All right. Well, turning our eyes to the Federal Reserve, maintaining its forecast of three interest rate cuts this year. Central bank officials also working out how to slow the shrinking of the Fed's balance sheet. Fed Chair Jerome Powell saying he expects it will be appropriate to start that slowdown, quote, "fairly soon."
Well, former Federal Reserve Bank of Kansas City CEO and President Esther George joining us now to discuss this. Thank you so much for joining us this morning. So first I want to get your takeaways here, especially on that QT timing and the pace of that roll off. What do you think that signals here?
ESTHER GEORGE: Well a couple of things, Rachelle. Obviously, the focus on the balance sheet has been there for some time. Remember, it has been a couple of years at the start of the tightening cycle when the Federal Reserve signaled its intention to significantly reduce that balance sheet and undertook what has been a really historic, aggressive run off of that to the tune of $95 billion a month.
I think always in the back of their mind, that they would have to begin to slow that because remember, they don't want to run into the situation that happened in 2019 when the demand for reserves was uncertain. We hit that point and caused some market dysfunction, if you will. So they're being very attentive to making sure that they can continue to fulfill that commitment to reduce the balance sheet. To do it in a way that doesn't cause disruption in the markets.
RACHELLE AKUFFO: And of course, we didn't hear exactly about the timing of that first rate cut, widely expected to be June, still not off the table at the moment. But as we push closer and closer then as we head into that election cycle at the end of the year, does that risk then causing some of this disruption that the Fed is trying to avoid?
ESTHER GEORGE: So I think the Fed has been quite consistent on their messaging to this point, which is, we are headed to 2%. We do see an opportunity in terms of confidence in the general direction of the economy and the path of inflation that it would give them the opportunity to cut rates. But I think as you heard this week, the chairman is not putting a pin on that, if you will.
He is really just sticking to the narrative of we want to continue to build that confidence, we want to see that inflation beginning to come back to target. So I think the date certainly is not any more certain than it was before in terms of when they'd start that rate cutting cycle.
RACHELLE AKUFFO: And he did note that the goal is to get inflation down over time. And you know, essentially, not in a rush. Taking a wait and see approach and seem to somewhat downplay the recent inflation data that we saw with CPI and PPI as well. Was that expected that he was just going to really stay neutral here as they look at really a longer time frame for this inflation picture?
ESTHER GEORGE: I think they want to be very careful. They don't want to unsettle where things are right now. I think the markets have come back into better alignment with the idea of when these rate cuts will be coming than they were a few months ago. And so I think for the Fed, maintaining a consistent message.
I think you heard the chairman refer to those as bumps in terms of the inflation data popping up, looking a little more sticky. That is true for today. I'm sure they're going to be watching carefully to make sure that continues to make the progress they're hoping for over the next two months. But as you can see from their dot plot, they have extended out. They have shown that they will be a little more patient in getting to that 2% and not try to risk weakening the economy and risking a recession.
RACHELLE AKUFFO: And talk about some of the stickier parts of the inflation picture that you're still waiting to see, perhaps, a more meaningful decline in.
ESTHER GEORGE: Well, as you know, Rachelle, we've seen the goods part of inflation. Those things that we buy and set up in our homes coming down. Housing has proven to be a little stickier than originally thought. And of course, services inflation continues to be quite strong. So I think for the Fed being able to look broadly at those inflation measures and see that it's coming down in general.
Right now, it looks pretty uneven in terms of where the disinflation is coming. So I suspect that's one of the things they'll want to see. Is this services inflation beginning to cool more. And that should contribute to their confidence that they're going to get back to that 2% target.
RACHELLE AKUFFO: And just very quickly, Chair Powell did say that a strong labor market in and of itself is not a reason to be worried about inflation. Does that suggest-- not necessarily a changing of some of the targets here but perhaps a different way of looking at it?
ESTHER GEORGE: I heard that too. I think the idea that the labor market has stayed so strong in the face of these higher interest rates suggests that supply side effects, more people coming into that workforce has been a positive. And that, of course, has not contributed to the inflationary dynamics. It would not be contributing to wage inflation.
And so I think in that sense, to the extent you are seeing supply of labor come in might not cause concerns about inflation. On the other hand, I think they also left open the door to saying, we will be watching that labor market because it is still relatively tight.
RACHELLE AKUFFO: Well, markets at least are rallying on what all the dovishness of what they heard and sort of shying away from some of the caution that they heard as well. Appreciate you taking the time to join us this morning. Kansas City Federal Reserve CEO and President Esther George, thank you so much.
