Baumann believes that factors like supply chain improvements and a surge in labor supply from immigration are unlikely to sustain “disinflation.” Additionally, geopolitical tensions, fiscal stimulus, and relaxed financial conditions pose additional inflation risks, prompting the Federal Reserve to possibly delay rate cuts until 2025.
Federal Reserve Governor Baumann has once again adopted a hawkish stance, warning of upward inflation risks and reiterating that it is not yet time for rate cuts, advocating for maintaining rates at elevated levels for some time.
On Tuesday, permanent voter and Federal Reserve Governor Baumann, speaking on monetary policy, stated that no rate cuts are expected in 2024, with the Fed possibly delaying rate cuts until 2025:
“We have not yet reached a point suitable for lowering policy rates, and given the risks and uncertainties in my economic outlook, I will maintain caution when considering future changes in policy stance.”
It is worth noting that Baumann is one of the most hawkish speakers at the Federal Reserve, and this statement is no exception.
The latest June dot plot from the Federal Reserve predicts that although no policymakers expect further rate hikes, the average expectation is for only one rate cut by the end of the year.
Multiple upside risks to inflation outlook
Baumann mentioned that inflation has only “slightly improved” so far this year. Supply chain improvements and the surge in labor supply from immigration are unlikely to continue:
1. The economy is unlikely to benefit further from supply-side improvements, as pandemic-related supply chain disruptions have been largely resolved, and recent months have seen limited growth in labor force participation rates.
2. A more open immigration policy in the U.S. and the scale of fiscal support since the pandemic may explain recent divergences between the U.S. and other major economies. Previous immigration has increased labor supply and improved labor market balance, while future immigration policies may tighten.
Additionally, limited availability of affordably priced housing inventory may drive rent increases due to inflows of immigrants in certain areas.
Overall, Baumann believes that several sectors could exert upward pressure on prices, expecting inflation to remain elevated for some time.
Tight labor market conditions have led to high wage growth, while geopolitical developments, fiscal stimulus, and relaxed financial conditions pose additional potential risks to the inflation outlook.
Therefore, Baumann argues that premature or swift policy rate cuts could lead to inflation rebound, necessitating future rate hikes to sustain inflation at 2% over the longer term.