Fed Cook Speech, Federal Reserve board member Lisa Cook discussed the year ahead at a conference this week, the FOMC has reduced rates by 100 basis points over the past three meetings to a range of 4.25% to 4.50%.
Federal Reserve Board Governor Lisa Cook shared her outlook for the upcoming year during a recent address at the University of Michigan. Her speech covered a range of topics, including market conditions, inflation trends, and key areas for monitoring.
Cook stated, “Overall, the U.S. economy starts the year in good shape.” She noted that economic growth was robust in 2024 and that inflation has significantly decreased from its peak two and a half years ago, although it remains slightly above the Fed’s 2% target. The labor market is holding strong, with low unemployment rates and wage growth outpacing inflation.
Inflation, as measured by Personal Consumption Expenditures (PCE), rose to 2.4% in November from 2.1% in September. Cook anticipates a gradual return to the 2% target in 2025, contingent on reducing housing inflation. “I expect more progress in reducing housing services inflation this year as the earlier slowing in rent growth impacts average rents,” she explained.
The Federal Open Market Committee (FOMC) has lowered rates by 100 basis points over the past three meetings, bringing the range to 4.25% to 4.50%. However, Cook stressed the importance of a careful strategy regarding further rate reductions as inflation remains a concern.
“I envisioned moving more quickly at the start of our easing campaign and then proceeding gradually as we approach neutral,” she said. Given recent labor market resilience and persistent inflation, she believes a more cautious approach to interest rate cut is warranted.
The FOMC's projections estimate two rate cuts in 2025 and two more in 2026, a reduction from previous forecasts of four cuts each year. Cook emphasized that monetary policy is not predetermined; future rate changes will depend on evolving economic data and risk assessments.
Cook also addressed financial stability, characterizing it as sound and resilient. She highlighted that high capital and liquidity levels in the banking system contribute to this resilience. However, she pointed out vulnerabilities, particularly among nonbank financial intermediaries (NBFIs), including hedge funds that carry high leverage and could face liquidity challenges due to market fluctuations.
“Valuations are elevated in several asset classes, including equities and corporate debt, where risk premiums are near historical lows,” Cook noted. This suggests that markets may be overly optimistic and vulnerable to significant downturns triggered by negative economic news or shifts in investor sentiment.
In her closing remarks, Cook discussed the need for vigilance regarding stablecoins. Currently, stablecoins represent about $170 billion in assets under management in the U.S. They are primarily used for digital asset investments but lack a comprehensive federal regulatory framework, with many operating overseas.
Cook warned that stablecoins, while potentially scalable, are susceptible to runs due to their peg to reference assets. “If a run on a large stablecoin were to occur, the liquidation of its backing assets could disrupt markets, especially if those assets are linked to commercial paper or certificates of deposit,” she explained.
She also mentioned that some stablecoins have redemption restrictions that can mitigate vulnerabilities. Cook concluded by emphasizing the importance of monitoring emerging risks in areas such as private credit, cybersecurity, and the impact of generative AI in finance.
“I will remain vigilant regarding evolving vulnerabilities and emerging risks, but I see a financial system that is sound, resilient, and capable of supporting households, communities, and businesses,” Cook stated. “This solid position aligns with a broader economy that is strong, featuring a healthy labor market and moderating inflation.”
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