Fed’s Approach to Interest Rate Cuts

The U.S. Federal Reserve is signaling a cautious approach to further interest rate cuts, citing resilient economic performance and stubborn inflation. Fed Governor Lisa Cook emphasized the need for a measured strategy in her speech at the University of Michigan Law School.

Resilient Labor Market and Sticky Inflation

Despite a series of rate reductions in late 2024, Cook noted the U.S. labor market remains strong, while inflation continues to exceed the Fed’s 2% target. “The labor market has been somewhat more resilient, while inflation has been stickier than I assumed,” Cook stated, reinforcing the need for a gradual approach to monetary easing.

Policy Rate Outlook

The Fed has already cut its benchmark policy rate by one percentage point over three meetings, bringing it to a range of 4.25%-4.5%. Cook suggested this rate may remain unchanged in the near term as the central bank assesses its impact. “We can afford to proceed more cautiously with further cuts,” she said.

Transitioning to a Neutral Stance

Cook reiterated her belief in transitioning toward a neutral policy stance over time. She noted that the initial rate cuts were intentionally aggressive to reduce policy restrictiveness but emphasized a slower pace as rates approach neutral levels.

Inflation and Employment Outlook

Cook expressed optimism about the U.S. economy, highlighting historically low unemployment and gradual progress toward inflation targets. However, inflation metrics have shown little progress in recent months, remaining above the Fed’s goals. December’s jobs report, set for release on Friday, will provide further insights into employment and wage trends.

Financial Stability Concerns

In her speech, Cook also addressed financial stability risks, pointing to the growth of private lending and its potential to introduce systemic shocks during crises. Additionally, she highlighted the dual-edged nature of artificial intelligence in finance, recognizing its potential for innovation while warning about shared biases and risks in AI models.

A Measured Path Forward

As the Fed deliberates its next steps, Cook’s remarks underscore the importance of balancing economic support with inflation control. The cautious stance reflects the central bank’s commitment to long-term stability, navigating a complex landscape of robust job markets and persistent inflationary pressures.