Are Rates Still Going Down?
There is a more cautious view that is slowing the Federal Reserve’s rate policy actions to lower interest rates. This perspective is held by a number of Fed governors.
The Federal Reserve is in a difficult spot and this is why the interest rate outlook is so muddy. Cut rates too much and we have high inflation. Don't cut rates enough and we have recessionary pressures.
We believe the Federal Reserve will likely choose to cut rates and live with slightly higher inflation on the hope that tariffs in 2026 will begin to moderate economic growth. Our bond portfolio positioning is based on this interest outlook perspective.
A recent CNBC article highlighted one Federal Reserve governor having a more cautious perspective on cutting rates. Excerpts are provided here.
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“Boston Federal Reserve President Susan Collins on Tuesday expressed support for the recent interest rate cut, but showed some skepticism on the extent of future moves as she sees continued threats from inflation.
Speaking in New York, the central bank policymaker noted risks to both higher inflation and a softening labor market that are keeping officials on their toes.
“In my view, a bit of easing was appropriate to address the recent shift in the balance of risks to our inflation and employment mandate,” Collins said in prepared remarks. “But I continue to see a modestly restrictive policy stance as appropriate, as monetary policymakers work to restore price stability while limiting the risks of further labor market weakening.”
The “modestly restrictive” phrasing has been used by officials to describe the current stance of policy as holding back growth — and inflation — while taking heed of easing payroll gains and a gradual increase in the unemployment rate.
A voter this year on the rate-setting Federal Open Market Committee, Collins noted a “highly uncertain environment” that would see “higher and more persistent inflation, more adverse labor market developments – or both.”
“Still, with less scope for inflationary pressures from the labor market, the upside inflation risks I was concerned about a few months ago are more limited,” she added. “In this context, it may be appropriate to ease the policy rate a bit further this year – but the data will have to show that.”
At the September meeting, Collins and her fellow officials narrowly indicated the probability of two more rate reductions this year, and that has been reflected in market pricing.”
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