Federal Reserve Governor Cook: Expects further rate cuts in the future, does not believe policy is on a preset track

According to the Zhitong Finance APP, Federal Reserve Governor Lisa Cook recently stated that she is closely monitoring further signs of weakness in the U.S. labor market while observing whether inflation continues to fluctuate on the path to the central bank's 2% annual target. Cook anticipates that there may be further interest rate cuts in the future, but she emphasized that no decisions will be made prematurely.

In her speech at the University of Virginia, Cook stated, "I still believe that the direction of the policy interest rate path is downward, but the magnitude and timing of rate cuts will depend on the latest data, the evolving outlook, and the balance of risks. I do not believe that policy is on a preset track, and I am ready to respond to changes in the outlook at any time."

She added that if the process of easing inflation halts, the Federal Reserve may pause rate cuts; whereas if there is greater weakness in the labor market, it may require a faster loosening of policy. In the case of a balance between the two, Cook expects rates to gradually decline to a neutral level, which neither stimulates nor suppresses economic activity.

Economic Outlook and Monetary Policy Adjustments

As a voting member of the Federal Open Market Committee (FOMC), Cook has served as a member of the Federal Reserve Board since May 2022. On November 7, the FOMC lowered the target range for the federal funds rate by 0.25 percentage points to 4.5%-4.75%, following a 0.5 percentage point cut in September, marking a consecutive rate cut after more than a year without adjustments.

Cook stated, "Overall, I believe the economic situation is good. The inflation rate has significantly declined from its peak in mid-2022, although core inflation remains slightly high. The unemployment rate remains at historically low levels, but the labor market is no longer overheating. Economic growth has been strong this year, and I predict that this expansion will continue."

She mentioned that although the risk of further weakness in the labor market still exists, her concerns about it have eased compared to a few months ago.

Latest Trends in the Labor Market

The unemployment rate in the U.S. has risen from a half-century low of 3.4% in April 2023 to 4.1% in October. Despite a slowdown in job growth, there has still been positive growth each month this year. Cook estimates that approximately 200,000 new jobs need to be added each month to keep pace with labor force growth and maintain the unemployment rate. However, the average monthly job growth over the past six months has only been 132,000.

Cook stated, "Overall, the national job growth remains robust, but it may not be sufficient to sustain the current low unemployment rate. Net job growth is slightly below the balanced level needed to accommodate changes in the labor force."

She also pointed out that as the labor market cools, wage growth is slowing and is no longer a source of inflationary pressure.

Future Path of Inflation

Cook expects that the inflation rate will continue to exhibit "fluctuations" on the path to the 2% target. The Federal Reserve's preferred inflation measure—the Personal Consumption Expenditures (PCE) price index—reached a peak annual growth rate of 7.2% in mid-2022, and the annual growth rate is expected to drop to 2.3% in October. Although the core PCE price index (excluding food and energy components) remains stubbornly high compared to the overall index, its annual growth rate is expected to fall to 2.8% in October, halving from its peak in 2022 She predicts that the overall and core PCE inflation rates will decline to 2.2% in 2024, with housing inflation being the main factor leading to the target being exceeded. Cook pointed out that lease contracts are typically renewed once a year, while the frequency of home sales is lower, so the decline in housing services inflation will be a slow process.

"Housing services account for a significant portion of core inflation exceeding our target," Cook said. "Existing rents are aligning with market rent levels, causing housing services inflation to remain temporarily high. I believe that as the impact of slowing rent growth for new tenants gradually becomes apparent, housing services inflation will gradually decline over the next two years."

The Federal Reserve FOMC will hold its next meeting on December 17-18. According to CME FedWatch data, interest rate futures indicate that the probability of the Federal Reserve cutting rates by 0.25 percentage points again is about 55%, while the probability of no rate cut is 45%