By Howard Schneider
(Reuters) – The U.S. Federal Reserve can be cautious with any further interest rate cuts given a solid economy and inflation proving stickier than previously expected, Fed Governor Lisa Cook said on Monday.
Since the Fed began cutting its benchmark policy rate in September, “the labor market has been somewhat more resilient, while inflation has been stickier than I assumed at that time,” Cook said in remarks for delivery at the University of Michigan Law School. “Thus, I think we can afford to proceed more cautiously with further cuts.”
The Fed reduced the policy rate by a full percentage point over its last three meetings of 2024, but is expected to keep the policy rate in the current range of 4.25% to 4.5% at the next meeting on Jan. 28-29.
“Over time, I still think it will likely be appropriate to move the policy rate toward a more neutral stance,” Cook said. However the cuts made to date “have notably reduced the restrictiveness of monetary policy. All along, I envisioned moving more quickly in the early stages of our easing campaign and then easing more gradually as the policy rate came closer to neutral.”
Cook said she felt the U.S. started the year “in good shape,” with the unemployment rate still low by historic standards and inflation “gradually — if unevenly — returning over time to our goal of 2% in a sustainable manner.”
Key measures of inflation showed little progress in the last half of 2024, and remain around a half percentage point or more above the Fed’s target.
Jobs numbers for December will be released on Friday, providing the latest insight on employment and wage growth.
Cook devoted much of her speech to her views on financial stability, and said she regarded the financial system as “sound and resilient.”
But she noted some areas that warrant close attention, including the growth in private lending, where the sometimes not-well-understood connections among lenders could be a source of shocks to the overall financial system in a crisis.
She added that the growth of artificial intelligence tools could be a source of innovation in the financial system, but also a source of risk if models share biases or make similar mistakes.
