Jan 17, 2024 - Economy

Why central bankers are skittish about early interest rate cuts

Illustration of a worried emoji with an upward trend line as the mouth.

Illustration: Allie Carl/Axios

Central bankers are wary about pivoting to interest rate cuts too early — and the data support that wariness. It's clear from a slew of news on both sides of the Atlantic.

Driving the news: At the World Economic Forum in Davos, European Central Bank president Christine Lagarde tamped down expectations of a rate cut this spring. A day before, Fed governor Christopher Waller in Washington also pushed back against the idea of a near-term rate cut.

Why it matters: Financial markets have become increasingly convinced that inflation is defeated and central banks will enter rate-cutting mode imminently.

  • Policymakers are not ruling out that possibility but also see two-sided risks. They want more evidence the inflation war is won.

The big picture: U.K. inflation was 4% over the year ended in December, up from 3.9% in November — the first increase in 10 months.

  • Meanwhile, U.S. retail sales rose 0.6% in December — a sign of strong consumer momentum heading into 2024 that suggests lingering demand in the economy. It's a key reason the economy has staved off a recession but may also reignite price pressures.

Between the lines: "Resilient consumer spending is at odds with the Fed's wishes and increases the risk that the first rate cut arrives later than investors expect," Nationwide's Oren Klachkin wrote in a note.

What they're saying: Lagarde acknowledged in an interview with Bloomberg that it's "likely" rate cuts could be ahead this summer.

  • But she added: "I have to be reserved, because we are also saying that we are data dependent, and that there is still a level of uncertainty and some indicators that are not anchored at the level where we would like to see them."
  • Lagarde also said a big risk would be if the ECB cut "too fast and had to come back to more tightening because we would have wasted the effort everyone put in the last 15 months."
  • Similarly, Waller said at the Brookings Institution on Tuesday that "we can see how the data comes in, see if progress is being sustained — the worst thing we can have is it all reverses and we've already started to cut."
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