Atlanta Fed President Raphael Bostic said in a speech Thursday that he doesn't see cutting interest rates until the third quarter, but that he is open to earlier cuts if there is "convincing" evidence of a surprise decline in inflation.
He noted in his speech that he had adjusted his "projected time" of when cuts could begin to the third quarter from the fourth.
"If we wait too long to begin adjusting policy, we run the risk of overtightening the economy," Bostic said in the speech before the Atlanta Business Chronicle in Atlanta.
Bostic, a voting member of the Fed's Federal Open Market Committee this year, is encouraged by the faster-than-expected progress in bringing inflation down.
He cited the latest reading on the Personal Consumption Expenditures index of 2.6% for the 12 months through November, compared with his forecast of 2.9% at that point.
Bostic's comments follow pushback from several central bank officials who pumped the brakes on market expectations for cuts in the first quarter of 2024.
One came this week from Fed Governor Christopher Waller, who said the Fed would not be rushed into an imminent loosening.
Last week Cleveland Fed President Loretta Mester said March was probably too early for a rate cut while New York Fed President John Williams said he only sees cuts happening when the Fed is confident inflation is sustainably moving back to its 2% target.
Investors appear to be listening to the pushback from policymakers. The market probabilities of a rate cut in March have dropped to 56% as of Thursday, per the CME FedWatch Tool. That's down from a 67% chance last week and a 71% chance seen a month ago.
Traders are also starting to rethink their prediction of six rate cuts in 2024, which is twice as many as the median projection from all Fed officials.
The Fed last raised rates in July to a 22-year high as part of an aggressive campaign to cool inflation. Its next policy meeting is Jan. 30-31, during which the central bank is widely expected to keep rates at their current level.
The latest inflation data is showing progress toward the Fed's target of 2%. When removing the volatile food and energy categories, "core" inflation as measured by the Consumer Price Index fell to an annual rate of 3.9% in December from 4.0% the month prior.
The Fed’s preferred inflation gauge, the Personal Consumption Expenditures index, looks even better at 3.2% as of November. More encouraging, core PCE inflation dropped to 1.9% on a six-month annualized basis, which is below the Fed’s target.
But other data released this week showed the economy is still surging at a time when the Fed is trying to cool it.
A surprise December retail sales report showed the US consumer ended 2023 in a stronger position than many thought, and the number of Americans applying for unemployment benefits last week fell to its lowest level in more than a year.
Bostic said that he will be looking at shorter time periods for inflation readings for clues to where 12-month inflation readings are headed.
Citing the six-month change in core PCE inflation of 1.9%, Bostic said he will be looking for continued good news there.
The Atlanta Fed head is also looking for evidence that wages adjusted for inflation return to pre-pandemic levels and job growth that continues at a cooling pace.
For Bostic to begin cutting rates sooner than the third quarter, he would need to see even faster progress.
"If we continue to see a further accumulation of downside surprises in the data, it’s possible for me to get comfortable enough to advocate normalization sooner than the third quarter. But the evidence would need to be convincing," he said.
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