Federal Reserve Governor Lisa Cook recently emphasized that lowering interest rates more cautiously would be appropriate given the resilience of the job market and the stickier-than-expected inflation. In a speech delivered in Ann Arbor, Michigan, Cook stated, "It makes sense to lower interest rates more gradually," highlighting her cautious approach to monetary policy. She added, "I think we can afford to proceed more cautiously with further cuts," suggesting that while there is room for adjustment, caution remains essential.
The Federal Reserve has already reduced short-term interest rates by a full percentage point, bringing them to a range of 4.25% to 4.50%. Cook noted that these rate cuts have "significantly reduced the restrictiveness of monetary policy," implying that further measures may be needed to maintain stability in an economy facing both strong labor market conditions and persistent inflation.
This cautious stance by Cook follows similar remarks from other Federal Reserve officials, including Adriana Kugler and Mary Daly. Kugler stated during the annual American Economic Association conference that while inflation remains a key focus for the Fed, "we want the unemployment rate to stay where it is" and not rise aggressively. As of November, the unemployment rate stands at 4.2%, with economists forecasting no significant change in December.
Economists expect a gradual cooling in job growth, with approximately 153,000 jobs added in December compared to 227,000 in November. Central bank officials will closely monitor inflation as they prepare for their next meeting on January 28-29 following Donald Trump’s inauguration on January 20.
The Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index, showed a moderation to 2.4% in November, down from a peak of 7.2% in June 2022 but still above the Fed’s 2% target. When excluding volatile food and energy costs, core PCE inflation fell to 2.8%, reflecting a significant improvement from peaks observed earlier in 2022.
Cook emphasized that inflation readings can be volatile on a monthly basis, and bringing inflation back down to the Fed’s 2% goal will likely involve navigating a "bumpy" process. However, she believes the latest data remain consistent with a trend toward achieving 2% inflation over time. She expects housing services inflation to slow this year due to reduced increases in rents for new tenants.
The cautious approach to lowering rates while maintaining a robust job market aligns with expectations from other Fed officials and sets the stage for a new Trump administration, which is expected to push tariffs and tax cuts that could introduce policy uncertainty. Cook described her vision for monetary policy as one of swift action initially but more gradual measures as the Fed approaches neutrality—defined here as a rate that neither stimulates nor suppresses economic growth.
"I still think it will likely be appropriate to move the policy rate toward a more neutral stance over time," she said, underscoring her belief in maintaining a balanced approach to managing economic conditions.
