jakiro
Wu Yu, Jin Shi Data
Financial market stability concerns, including the risk that asset prices could fall sharply, are becoming a new theme as Fed officials discuss the timing and even whether to cut interest rates.
In a speech at Georgetown University on Thursday, Federal Reserve Governor Lisa Cook did not specifically comment on near-term interest rate policy.
But she cited a range of risks to the financial system, including rapidly growing private credit markets, hedge fund trading in Treasury markets and the use of generative artificial intelligence in machine trading.
Cook also hinted that she wouldn’t be surprised by a collapse in asset prices at historically high levels– These highly valued assets have supported overall consumer spending and the broader U.S. economy – although the decline itself does not indicate financial market instability.”Right now, my sense is that the likelihood of a sharp decline in asset prices has increased.”
On a separate occasion earlier, Cleveland Fed President Beth Hammack reiterated her opposition to further rate cuts as inflation remains too high and said she believedLoose financial conditions are another argument against cutting interest rates.
While rate cuts may be seen as “buying insurance” for the job market, she said, “we should remember that such insurance may come at the cost of exacerbating financial stability risks.”
Like Cook, she said she believed the financial system was in good shape, with banks well capitalized and household balance sheets strong.But like Cook,Hammaker also said she is concerned about high leverage levels in hedge funds and believes private credit is worth watching.
The pair’s comments echoed broader concerns among Fed policymakers, as highlighted in the minutes of the Federal Reserve’s October meeting released on Wednesday.
“Some participants commented on the issue of overvaluation of assets in financial markets, with several participants highlighting the potential for a disorderly decline in stock prices, particularly if the market suddenly reassesses the likelihood of AI-related technologies,” the minutes said.
The debate among policymakers has centered on whether another rate cut would send inflation that has been running above the Fed’s 2% target for years further in the wrong direction, or whether a more pressing concern is a weak labor market that requires further easing from the Fed.
On Thursday, two Federal Reserve officials seen as hawkish again expressed uneasiness about inflation.
Federal Reserve Governor Michael Barr said Thursday that the central bank needs to be cautious when considering further interest rate cuts.
“I’m concerned that the inflation we’re seeing is still around 3 percent, and our goal is 2 percent and we’re committed to that 2 percent goal,” Barr said.”So we need to be cautious with monetary policy now because we want to make sure that we deliver on both sides of our dual mandate.”
Barr has not announced his opposition to another rate cut, but his uneasiness about stagnating inflation will complicate the job of Fed Chairman Jerome Powell, who is trying to build consensus among divided policymakers ahead of a Dec. 9-10 meeting in Washington.
Barr supports the Fed’s interest rate cuts in September and October, but has so far given no signal on December.His vote could be crucial as several of his colleagues have publicly spoken out for or against a third consecutive rate cut, leaving the outcome highly uncertain.
On another occasion in Indianapolis,Chicago Fed President Austan Goolsbee said he remains concerned about another interest rate cut in December.
Inflation progress “appears to have stalled and, if anything, provided warnings of moving in the wrong direction,” Goolsby said.”It makes me a little uneasy.”
The Federal Reserve finally received new official employment data after a lengthy government shutdown, but so far they have not done much to resolve the disagreements among policymakers.The September jobs report released by the Bureau of Labor Statistics on Thursday presented a mixed picture: Employers added 119,000 jobs – the best data since April – but the August figure was revised downward, with the unemployment rate rising slightly to 4.4%.
After the data was released, Barr said he believed the labor market was “softening somewhat,” with the economy creating jobs close to the so-called “breakeven” level, which is the level that keeps the unemployment rate steady.
Harmack called the September jobs data “outdated” and reiterated her opposition to additional interest rate cuts.”Lowering interest rates to support the job market has the potential to prolong periods of high inflation and may also encourage risk-taking in financial markets. This means that when the next recession comes, it is likely to be larger and have a greater impact on the economy than would otherwise have been the case,” she said.
After the data was released, traders stuck to their previous expectations that without data showing a decisive collapse in the job market, the Fed would likely skip a rate cut in December and then cut rates by another 25 basis points in January.The Bureau of Labor Statistics won’t release another comprehensive report on the employment situation until a week after the Federal Reserve’s December meeting.
