Federal Reserve taking cautious approach to interest rate cuts

Investing.com — The Federal Reserve is taking a careful approach to the prospect of interest rate cuts, even as U.S. inflation is likely to slow in the coming months, according to analysts at Macquarie on Tuesday.

In a note to clients, the analysts said that there has been „no lack of cautious banter” from the Fed in recent days.

Several officials have said that they would like to see more evidence that price gains in the U.S. are cooling back toward their stated 2% target before they will begin to bring borrowing costs down from more than two-decade highs.

Minneapolis Fed President Neel Kashkari echoed this sentiment in an interview with CNBC on Tuesday, telling the business news channel that the central bank should wait for more substantial progress on inflation before considering cuts.

„I’m not seeing the need to hurry and do rate cuts, I think we should take our time and get it right,” he told CNBC.

Although the Macquarie analysts said they believe the Fed will eventually be persuaded to ratchet down interest rates due to rent-related costs over the next few months, it „seems pretty inevitable” that the central bank will raise its estimates for so-called „R-star” — the estimated rate that could prevail when the economy is strong and inflation stable.

The analysts added that they expect the U.S. dollar will be kept from „rallying more” as the Fed’s caution diverges with „a relatively impestuous” European Central Bank. Unlike the Fed, ECB officials have largely signaled that they are set to begin a cycle of rate easing at its upcoming meeting in June, with Governing Council member Francois Villeroy even suggesting that a follow-up cut could come as soon as July.