MNI: Fed Will Wait On Rate Cuts In Strong Economy-Stevenson

The Fed will wait longer to cut interest rates than investors expect because policymakers want to be sure inflation continues slowing amid robust growth and the threat global prices are driven up by geopolitical conflicts, former White House economist Betsey Stevenson told MNI.

“They’ve got to take their time before they cut. The point is to have stable and dependable rates and make sure they are hitting their inflation target,” said Stevenson, a former member of the White House Council of Economic Advisers. Fed Chair Jerome Powell “has been clear that they needed to hold and for longer than people expected them to hold.”

Stevenson expects the Fed to wait well into 2024 before starting to reduce borrowing costs from a 23-year high range of 5.25%-5.5% and do so gradually, in contrast with markets that have been pricing in as many as six rate cuts this year. The biggest threats to U.S. inflation and growth are external and include geopolitical threats from escalating conflict in the Middle East, she said.

“I don’t see any strong inflation pressure currently but what would happen if we had a big supply shock? Those are big risks,” she said.

NO WAGE PRICE-SPIRAL

Friday's jobs report shows the labor market remains robust and seasonal factors specific to the month of January mean that the stronger-than-expected gain of 353,000 jobs should not be too worrisome for Fed officials from an inflation standpoint, Stevenson said.

Even the strong 4.5% rise in average hourly earnings in January from a year earlier reflects some special factors, said Stevenson, also a former chief economist at the Department of Labor.

“The fear is that wages rising at that rate will be associated with ongoing inflation being too high but even the high hourly wages were actually really driven by decreased hours and the decreased hours likely reflected weather problems,” she said.

More broadly, wages have been playing catch up to inflation in this economic cycle rather than driving price pressures, said Stevenson. “This experience of inflation that we’ve had has been unusually independent of the labor market. Wages and the labor market have played no role in either bringing inflation up or pulling it down,” she said.

EMPLOYMENT, BUSINESS DYNAMISM

“The U.S. labor market has proven more dynamic than people thought it was prior to the pandemic. We had talked about stagnating new business formation, in many ways a stagnating labor market – it took 10 years to come out of 2008," she said.

“Coming out of the pandemic we’ve had the kind of labor market that we remember from the 90s. That comes with some bad things, you see a lot of people losing jobs but there’s so much new job creation and change that it provides new job opportunities and allows us to adapt.”

The large fiscal response likely played a role in reviving this dynamism by putting a financial floor under middle- and lower-income households that allowed people to begin taking on new ventures, said Stevenson, who served under former President Barack Obama.

“The Biden administration very smartly tried to target these investments to communities that have had the biggest problems growing employment,” she said.