Leading Fed official “open” to rate cut in September in view of declining inflation

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A senior US Federal Reserve official has said he is “open” to cutting interest rates in September and warned that the US central bank cannot afford to be “late” in easing its monetary policy given signs of a slowdown in the labour market.

Raphael Bostic, president of the Atlanta Fed and a voting member of the central bank's interest rate committee, told the Financial Times that as price pressures ease, central bankers must also be aware of their responsibility to maintain full employment.

“Now that inflation is back in check, we need to look at the other side of the mandate, and there we have seen that the unemployment rate has risen significantly from its lows,” Bostic said.

“But I'm thinking about when the time is right, so I'm open to something happening before the fourth quarter and us moving.”

Bostic was aware that the Fed had a lot at stake as it considered when and how quickly to ease monetary policy.

“Waiting carries risks and that is why we must be particularly vigilant here,” he said. “As our policies have a lagging effect in both directions, we cannot afford to be late. We must act as quickly as possible.”

The Atlanta Fed chief's comments will further reinforce market expectations that the central bank will begin cutting interest rates in September for the first time since the devastating Covid-19 pandemic hit the U.S. economy in 2020.

Traders in the federal funds futures markets expect the Federal Reserve to cut interest rates by a full percentage point by the end of 2024. A cut of at least half a percentage point would be needed at one of the three remaining meetings of the year.

The Fed's next meeting will be in mid-September, six weeks before the November presidential election, then it will meet again shortly after the election before meeting for a final time in December.

A pre-election cut in borrowing costs would be welcomed by the White House but would be politically controversial, as Republican candidate Donald Trump warned the Fed against cutting interest rates last month.

Bostic had previously advocated a rate cut towards the end of the year and warned that the Fed must be “absolutely sure” of its control over inflation before lowering borrowing costs.

Bostic's change of stance came after inflation data for July showed that annual consumer price growth fell below 3 percent for the first time since March 2021 – a sharp decline from the peak of over 9 percent in June 2022.

“We have been saying for a long time that we want to see numbers that give us more confidence that we are sustainably on track to 2 percent, and I have to say the numbers that have come in over the last few months have given me even more confidence that we are sustainably on that track,” Bostic told the FT.

The consumer price index report published on Wednesday was a “very, very positive sign,” he added.

The Fed has kept interest rates at a 23-year high of 5.25 to 5.5 percent for over a year to keep inflation under control. While the labor market remains strong, there are signs that its resilience is waning.

Monthly job growth continued to slow in July as the unemployment rate rose to 4.3 percent for the fourth consecutive month, fueling fears of a recession in the world's largest economy.

Bostic described the labor market on Wednesday as “slacking but not weak” and said companies in the southern United States he spoke to were pausing hiring rather than laying off employees.

Asked whether the Fed should consider cutting interest rates in half-percentage point increments rather than just quarter-point increments if the labor market weakens faster than expected, Bostic said, “Everything is on the table.”

“If we see that there are disruptions that indicate that labor markets are going to collapse – or could [collapse] “I would very much support taking more forceful action to minimize that pain,” he added, but said that was not his view.