By Ann Saphir

(Reuters) -The Federal Reserve’s policy rate continues to act as a brake on the resilient labor market and on inflation that is still above the 2% target, two U.S. central bankers said on Tuesday, a view that appears to argue for more interest rate cuts, even as both signaled they were not ready to judge how fast or by how much.

“In my judgment we are still in a modestly contractionary stance, but ultimately the economy will guide us, in terms of how far we are needing to go” in cutting the Fed’s benchmark for short-term borrowing costs, Minneapolis Fed President Neel Kashkari said at a Yahoo Finance event.

Speaking earlier, Richmond Fed President Thomas Barkin called the current level of rates “somewhat less restrictive” than it had been, and said he could see scenarios where demand rises and the central bank needs to focus on containing inflation, and others where businesses start laying off workers and it needs to turn more to protecting the job market.

“With the economy now in a good place and interest rates off their recent peak but also off their historic lows, the Fed is in position to respond appropriately regardless of how the economy evolves,” Barkin said at an event in Baltimore. 

The Fed cut its policy rate last week by a quarter of a percentage point to the 4.50%-4.75% range. Short-term borrowing costs are now 75 basis points below where they were two months ago, just before the central bank started reducing rates to bring them more in line with falling inflation and what appeared to be a quickly cooling labor market.

In September, Fed policymaker projections were consistent with another quarter-percentage-point rate cut in December, and four more like-sized reductions next year, bringing the policy rate to the 3.25%-3.50% range.  

Since then, a lot has happened that could complicate the central bank’s next steps.

Inflation by the Fed’s targeted measure was 2.1% in September, just above its target, but measures of underlying inflation that strip out volatile energy and food prices have been stuck higher, with little sign of recent progress. Economists expect more of the same when the U.S. Labor Department releases the consumer price index for October on Wednesday.

Monthly job gains have dropped, but unemployment, at 4.1%, is low by historical standards. Policymakers are watching for signs of further weakening – which would suggest the need for more rate cuts – or of continued resilience, and they will get just one more monthly employment report before their Dec. 17-18 meeting.

NEW ADMINISTRATION

Republican President-elect Donald Trump’s victory in last week’s election also creates fresh uncertainty. Trump, who will take over from Democratic President Joe Biden in January, has promised to cut taxes, impose new tariffs on imports, and deport a record number of immigrants. While financial markets have generally moved to price in faster economic growth and fewer interest rate cuts as a result, central bankers say they can’t plan a response until it’s clear exactly what policies will be enacted.

Asked what could prompt the Fed to pause rate cuts at the December meeting, Kashkari said he feels there is too little time between now and then for the data to show a reheating of the labor market.

“I think there’d have to be a surprise on the inflation front to change the outlook so dramatically,” Kashkari said. “The bigger question long run is where are we going to settle?”

Kashkari said he believes the level of borrowing costs that neither stimulates nor restricts the economy – the so-called neutral rate – is likely higher than in the past, perhaps because productivity has increased. 

Although a higher neutral rate could be one argument for fewer rate cuts ahead, Kashkari steered clear of making predictions, as did Barkin. 

“I think we all agree we are above neutral now,” Kashkari said. “But over the course of the next year, we’re going to get a lot more information about where neutral is.”