Fed’s Cook: Future Rate Cuts to Proceed Cautiously

Overview

The U.S. Federal Reserve may adopt a more cautious approach to further interest rate cuts due to a resilient labor market and persistent inflation, according to Fed Governor Lisa Cook. Speaking at the University of Michigan Law School, Cook highlighted that while recent monetary easing efforts have had a positive impact, inflation remains higher than previously anticipated.

Economic Resilience and Inflation Concerns

Since the Fed started lowering its benchmark policy rate in September, economic data has shown surprising resilience. Cook remarked, “The labor market has been somewhat more resilient, while inflation has been stickier than I assumed at that time.”

Given these conditions, Cook believes it’s prudent to slow down the pace of rate cuts. She stated, “I think we can afford to proceed more cautiously with further cuts.”

The Fed has already reduced the policy rate by a full percentage point over its last three meetings of 2024. However, analysts expect the rate to remain in the current range of 4.25% to 4.5% at the upcoming policy meeting scheduled for January 28-29.

Approach to Monetary Policy

Cook emphasized the importance of balancing speed and caution in monetary policy. “Over time, I still think it will likely be appropriate to move the policy rate toward a more neutral stance,” she explained. Despite this longer-term goal, she noted that the cuts so far have meaningfully eased monetary policy, adding, “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 expressed confidence in the U.S. economy, stating, “We started the year in good shape,” citing a historically low unemployment rate and a gradual, though uneven, return of inflation toward the Fed’s 2% target.

Inflation and Labor Market Outlook

While progress toward the Fed’s inflation target has been slow, key inflation measures remain around half a percentage point or more above the desired 2% level. Cook acknowledged the challenge of achieving sustainable price stability.

The upcoming December jobs report, due for release on Friday, will offer further insight into employment trends and wage growth—key factors in determining future monetary policy decisions.

Focus on Financial Stability

In addition to monetary policy, Cook dedicated part of her speech to discussing financial stability. She reassured that the U.S. financial system remains “sound and resilient” but cautioned against potential vulnerabilities.

Specifically, Cook pointed out the risks associated with the rise in private lending, noting that the complex and sometimes opaque nature of such connections could amplify financial shocks during a crisis.

She also highlighted the dual impact of artificial intelligence (AI) tools in the financial sector. While AI can drive innovation, Cook warned of potential risks, stating that shared biases or simultaneous errors in AI-driven models could create systemic risks.

Conclusion

Fed Governor Lisa Cook’s remarks underscore a careful and deliberate approach to monetary policy in 2025. As inflation lingers and financial stability remains a top concern, the Fed is likely to maintain its cautious stance on further rate cuts while closely monitoring key economic indicators.

The upcoming policy meeting in late January and the release of new employment data will provide clearer signals on the Fed’s next steps.

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