MNI INTERVIEW: CPI Keeps Fed On Track For '24 Cuts-Ireland

U.S. inflation appears to be resuming its downward trend following a bumpy start to the year, which should allow Federal Reserve officials to begin cutting interest rates in the fall, former Richmond Fed economist Peter Ireland told MNI.

Ireland said the hotter-than-expected readings on inflation in the first three months of the year likely pushed the first Fed cut from the summer to the fall, but April CPI figures' showing moderation means there’s still room to ease in 2024.

“What the FOMC is looking for is just confirmation that the downward trend in inflation is intact. That, more than anything else, is the necessary condition for lower interest rates in the second half of this year,” said Ireland, now a Boston University professor, in an interview.

“Yesterday’s stats put us back in the frame of mind that maybe the downward trend is intact. It was good news and reassuring news.”

U.S. core and headline CPI both rose 0.3% in April, in line with market expectations. CPI is up 3.4% from a year ago and the increase in core CPI slowed to 3.6% from 3.8%.

“It's still reasonable to think policymakers will be entertaining modest rate cuts before the year is over,” said Ireland, who expects one or two rate cuts starting late fall. (See MNI INTERVIEW: Labor Cracks To Underpin Fed Cuts-Staffing Group)

BETTER BALANCE

Ireland, a member of the Shadow Open Market Committee, believes the economy is heading for a rare soft landing but that it might not feel that way to most Americans because of their negative experience with a higher price level even as inflation stabilizes.

“Nothing suggests we’re heading into a recession, but as a whole the incoming data on the real economy suggest the imbalances are going away, that there has been a modest but real slowdown in economic growth,” he said. “The retail sales data are consistent with that, as are job openings.”

Officials should refrain from declaring victory, however, lest they sound out of touch with public sentiment, Ireland said.

“What ordinary people think about is the cost of living is a lot higher than it was in 2020,” he said.

NOMINAL GDP

Looking at the behavior of nominal GDP is particularly useful at the current economic juncture, said Ireland.

For one thing, such quarterly figures help break through some of the monthly noise that adds to excessive market volatility. (See: MNI INTERVIEW: Demand Boom Keeps Fed Patient For Longer-Koenig)

“It's a nice convenient way of aggregating the short-run effects to get a better feel for what policy is doing,” he said. “If you look at year-over-year growth in nominal spending, it’s certainly evident the trend in nominal GDP growth is downward, and that downward trend remains.”

Ireland also wishes Fed officials were more open to using policy rules as basic guidelines to the rate path, because not doing so leaves markets adrift in a counterproductive way.

“The costs of that is it adds an element of uncertainty into business and financial decision making.”