Interim President of St. Louis Federal Reserve: A Patient Approach to Interest Rates

The U.S. central bank has opted to gather further data on the economy and inflation before making any decisions regarding interest rates, according to Kathleen O'Neill Paese, the interim president of the St. Louis Federal Reserve.

A Considered Decision

Paese recently expressed her support for the Federal Reserve's choice to keep short-term interest rates unchanged. Engaging in discussions with business leaders allowed her to gauge that inflation pressures and labor shortages were gradually easing.

However, there were additional factors that influenced this decision, such as tighter lending standards and a surge in long-term rates, particularly those related to mortgages.

Nevertheless, Paese acknowledged that the Fed has the flexibility to raise rates in the future if inflation persists at an uncomfortably high level. She highlighted that inflation has been fluctuating horizontally rather than decreasing in recent times.

Predictions and Economic Performance

As a member of the senior Fed officials in September, Paese was among the majority who foresaw another rate hike before the close of 2023 in what is referred to as the dot plot.

She suggested that the strong performance of the economy in the third quarter, coupled with substantial growth in employment in September, appeared to warrant further rate adjustments. However, she cautioned that these indicators were backward-looking, and subsequent reports on the economy, including the October jobs report, exhibited softer trends.

Given this uncertainty, Paese emphasizes the importance of waiting for additional data before reaching a conclusion about appropriate policy tightening.

A Balanced Approach

Paese maintains that the current benchmark rate, which stands at 5.25% to 5.5%, remains moderately restrictive without being overly tight.

She assumed the role of interim president after James Bullard's departure during the summer. However, she is not a voting member this year on the Fed's interest-rate setting panel.

As the U.S. central bank continues to assess economic indicators and inflation levels, it remains committed to a cautious and patient approach to determining the path of interest rates.