Top Fed Officials Cast Doubt on Further Rate Cuts

Two top Federal Reserve officials on Friday suggested the U.S. economy is unlikely to need lower borrowing costs even as it navigates a possibly rocky stretch in the economy.

"The current stance of monetary policy should help the economy get through the rough patch during the next year, with growth then likely to return to its longer-run sustainable rate," Fed Governor Randall Kroszner told the Institute of International Finance.

"A sequence of data releases consistent with the rough patch for economic activity that I expect in coming months would not, by themselves, suggest to me that the current stance
of monetary policy is inappropriate," he added.

St. Louis Federal Reserve Bank President William Poole, who like Kroszner will have a vote on interest rates at the Fed's next meeting on Dec. 11, made comments in a similar vein, saying it would take an unexpectedly weak fourth quarter to bring about a change in the Fed's current policy stance.

The Fed has lowered the overnight federal funds rate twice over the past two months, bringing the benchmark rate down to 4.5 percent.

"If the fourth quarter comes in exactly as anticipated, and given that there's already been 75 basis points of easing, and given that we can't affect the fourth quarter anyway -- the
fourth quarter is going to be irrelevant to the December decision unless it tells us something about next year we don't already know," he said in an interview with Dow Jones Newswires.

Scale Back Expectations

The one-two punch from Kroszner and Poole led financial markets to slightly scale back their expectations of further rate cuts. After the hawkish comments, U.S. short-term interest rate futures implied an 86 percent chance of a December rate cut, down from 94 percent late on Thursday.

On Thursday, Kansas City Federal Reserve Bank President Thomas Hoenig had also suggested the case had yet to be made that further interest rates cuts were needed.

"I am not at all opposed to necessary actions either way for the future, but I think that we need to be mindful and let this data come in," he said in response to a question after a
speech in Santa Fe, New Mexico. "Right now I am in a wait-and-see mode, at least until the December meeting."

The Fed slashed the federal funds rate by a half-percentage point on Sept. 18 and followed up with a quarter-point reduction on Oct. 31. Fed officials have described those cuts as a front-loading of what would be needed to help the economy through a deep housing downturn and credit market stress.

Policy-makers said after their October meeting that the rate reductions had brought the risks of slower growth and worries about higher inflation roughly in balance, a message they have been emphasizing regularly since then.

"The limited data and information received since the October (Fed meeting) have not changed my thinking in this regard," Kroszner said.

Softer Stretch Ahead

Although the economy logged a robust 3.9 percent annualized growth rate in the August-September period, it appears on course for a softer stretch marked by declines in homebuilding
and a deceleration in consumer and business spending.

But Kroszner said further moves by the Fed would likely not carry the same punch as the two rate cuts the central bank had already made.

"Unless underlying conditions or risks change substantially, reductions in the target federal funds rate tend to be associated with decreasing incremental benefits in terms of further mitigating ... risks and with increasing incremental costs in terms of the potential for inflation to increase," he said.

Kroszner also raised the specter of lurking inflation as a concern that has increased recently with oil prices flirting with $100 a barrel.

Inflation expectations are well-anchored, Kroszner said. But he added that he will be watching both market indicators and the government's statistical data carefully for any sign inflation expectations have become unmoored.

While core inflation, which strips out volatile energy and food costs, has been moving in a favorable direction, there was a risk that the run-up in oil prices could lead to a broader
inflation, Kroszner said.

"The prices of oil and other commodities continue ... to be a source of major uncertainty for the overall inflation outlook," he said.