Recent Fed Speeches Signal Rate Cuts Unlikely, Analysts Say

A series of speeches by Federal Reserve policy makers in recent days has left many with the impression that interest rate cuts are highly unlikely in the coming months.

“I think the Fed is going to be very reluctant to change rates anytime soon,” said David
Resler, Chief Economist at Nomura Securities International, in an interview on
CNBC’s “Power Lunch.”

The central bank has left its key federal funds rate on hold since last August. That decision brought to an end a two-year campaign of rate increases, which boosted rates to 5.25%. The rate-setting Federal Open Market Committee will meet again at the end of this month. Officials are widely expected to leave rates alone at that meeting, but investors are focused on where they head from there.

Fed More Inclined To Hike Rates

“(It appears the Fed will be) more inclined to raise rates, I suspect, judging from what they have been saying lately,” Resler said. He said he suspects he is one of several economists who has increased his fourth-quarter economic growth forecast.

“It looks like we’re going to get back close to trend growth earlier than we thought, and I think it’s convinced me that the Fed is not going to change to the downside this year,” Resler said.

According to Robert Brusca, chief economist at Fact & Opinion Economics, Fed policy makers have been going out of their way to say the same thing, but they have not been clear about whether their bias is to raise or lower rates in the months ahead.

“The message from the Fed is they’re holding their cards pretty close to their vest,” Brusca said.

Of all the Fed speakers this week, Boston Federal Reserve President Cathy Minehan has struck the most dovish tones. Minehan, who earlier today announced her plans to retire from the Fed this year, said on Monday that price pressures may be “beginning to ebb.” However, she also said “inflation has been and remains a challenge.”

Robert Moskow, the Chicago Fed President, has been on the other side of the spectrum. He reiterated that inflation is his “predominant concern.

“We've seen some welcome easing in inflation in the past couple of months, and I'm hopeful this development will continue,” Moskow said on Wednesday. “But there is still the risk that resource pressures or other factors, such as elevated inflation expectations,
could prevent actual inflation from falling in a timely fashion."

Moskow is about to become a voting member of the FOMC, and some wonder if he’ll replace Jeffrey Lacker, who had been the lone dissenting voice on the FOMC. Lacker felt the Fed should have continued with its interest rate increases.

Inflation Above Comfort Zone

Although price pressures have lessened, inflation remains above the Fed’s comfort zone, Brusca said. He said he expects this is one reason why investors are parsing every word from the Fed.

Brusca continues to expect further rate increases are in store at some point this year.

“The data are mixed,” Brusca said. However, he sees strength coming from the tight labor market. Easing energy prices, a firming housing market and abating manufacturing inventories also will help the economy, he said.

These points were echoed by the Fed speakers this week.

"If you take out housing and ... if you take out autos right now too, the rest of the economy seems to be running pretty much at full capacity," Fed Governor Susan Bies said earlier today.

"We're hearing there are shortages of skilled labor in so many industries,” she said. “So it's that construction piece of it that is affecting the aggregate number. But the rest of the economy seems to be moving along at a very, very healthy pace."