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MNI (Ottawa)

(Repeats article first published on Jan. 25)

The Federal Reserve’s December estimate for three interest rate increases this year already looks outdated, and even market expectations for four hikes this year may be too conservative, former Fed economists tell MNI.

“Anyone who says the Fed is done pivoting is totally wrong -- they’ve barely started,” said Andrew Levin, a former economist at the Federal Reserve Board of Governors for two decades and now at Dartmouth College, in an interview.

Fed Chair Jerome Powell should use this week’s press conference to warn markets that the Fed “may need to move at every meeting this year. That means the federal funds rate could be closer to 2% by the end of the year,” he said.

The risk of persistently elevated inflation means the Fed keeps falling further behind, because interest rates adjusted for inflation are becoming increasingly negative, Levin said.

"It will depend very much on the monthly inflation data, but to the extent it surprises on the high side, they might hike at every meeting after March," said Joseph Gagnon, a former Fed Board economists now at the Peterson Institute for International Economics.

Jon Steinsson, a Berkeley economics professor who is also a visiting researcher at the San Francisco Fed, said the U.S. central bank "should increase rates by 25 bps at each meeting this year starting in March. That would make seven rate hikes this year."

Glenn Hubbard, former chair of the White House Council of Economic Advisers and an ex-adviser to the New York Fed, agrees the Fed’s December forecasts for just three became quickly stale after inflation figures showed no sign of abating and the jobless rate kept falling.

“We’re going to need some combination of rate increases and quantitative tightening,” Hubbard told MNI. “The market is guessing it would be four-plus rate increases -- I think that’s probably right.”


The Fed will not release new forecasts for the economic and rate outlook this week, but ex-staffers believe the March Summary of Economic Projections could take yet another hawkish turn.

“I've got to believe that in the next SEP we're going to see much higher projections for the funds rate,” said Ken Kuttner, a former assistant vice president at the New York Fed. “It's hard to imagine they could stay put in this environment."

U.S. inflation has surpassed even the most pessimistic forecasts, surging by 7% in the year to December according to the CPI, while the Fed's preferred PCE jumped 5.7% in the year to November.

Current market pricing for four, potentially five interest rate hikes tends to mask the idea this would still be a very mild tightening in the face of such inflation rates.


“Remember that back in 2003, 2004 in that tightening cycle it was considered to be a very gradual pace of tightening when they hiked eight times a year,” said Jonathan Wright, a former member of the Fed Board’s division of monetary affairs. “From that perspective, three or four is an extremely slow pace of tightening."

Levin said the best-case scenario for the Fed is one in which inflation does start to come down rapidly over the next six to nine months toward the Fed’s 2% target, an outcome that he sees as highly unlikely.

Michael Bordo, a former Fed board and Bank of England visiting scholar, laid out the Fed’s neutral rate predicament.

“If you calculate the real interest rate it is around -3% to -4%. It is going to take a large amount of tightening to get back to normal."

MNI Ottawa Bureau | +1 613-314-9647 |
MNI Ottawa Bureau | +1 613-314-9647 |

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