MNI: Fed Seen Retaining Hawkish Bias - Ex-Officials

The Federal Reserve is expected to raise rates by 25 basis point and keep its tightening bias this week, reflecting upside risks to the FOMC's inflation projections, ex-Fed policymakers and staff told MNI, though some expect the Fed not to hike again until Nov 1.

CPI fell by more than expected to 3.0% in June in a signal that disinflation is taking effect after 500 bps of rate hikes, but the surprising resiliency of the U.S. economy and a very strong labor market also lend weight to the BIS's warning last month that the last mile on containing prices may be the most challenging, the former officials said.

"What they should be talking about at this meeting is what is happening to underlying inflation and determine when the 2% objective will be achieved, and if that pace is acceptable," former Atlanta Fed President Dennis Lockhart said.

"Headline seems to be moving decisively toward target, but looking at core and other cuts of the numbers like trimmed mean, median and others, you’d have to say inflation is well above target and disinflation is slow," he said. "The economy continues to motor on in a robust manner, and I attribute that to solid consumer activity supported by a good employment outlook, the labor imbalance and a tight job market. There could be structural elements to that, which means it could be around for some time."

EVERY OTHER MEETING?

The June dot plot showed most Fed officials penciled in at least two more rate hikes in the second half of 2023, but Chair Jerome Powell has said the speed of those increases is less critical than earlier in the cycle.

Some former officials said the Fed could be moving to an every-other-meeting hiking pattern if core inflation comes in as expected, even if policymakers won't publicly commit to that.

"It seems from the way that they're behaving like the pattern now is they'll move, then they'll pause again, and maybe move it up once more with the meeting after that" in November, said ex-Richmond Fed economist Peter Ireland.

Eric Swanson, a former senior research adviser at the San Francisco Fed, agreed, but emphasized a better-than-expected inflation outlook could see a second hike postponed.

"They want to continue to raise. They're going to raise cautiously," he said. "I think they'll probably take another pause at the meeting after this one. Then after that, they'll probably just say we'll see how the data is coming in. Maybe raise again, or maybe pause again."

TIME TO RESPOND

Lockhart said the decision on rate increases after July depends heavily on the inflation trend and officials' working assumptions on policy lags.

"They’re going to be looking closely at a variety of data to determine whether the accumulated hikes are having an effect and how much further there is to go," he said.

Policymakers appear to be worried lags from monetary tightening have shortened compared to past interest rate hiking campaigns, raising the odds that past hikes are not enough to tame inflation, but more dovish officials say the economy has yet to feel the full brunt of the Fed's past rate rises. (See MNI INTERVIEW: Fed's Bostic Wants Rates On Hold Until End 2024)

"They tightened a lot last year and early this year and so there's some debate about how much of that tightening has started to show through into the economy," said Swanson, also a former staffer at the Fed Board. "That's one of the reasons to be cautious to give the economy time to respond to what they've already done."