MNI INTERVIEW: Ex-Fed Reinhart Sees Pause Lasting Through 2020

-- Economy Likely To Continue At Trend With Inflation Taking Time To Develop

By Evan Ryser

     WASHINGTON (MNI) - The Federal Reserve will pause interest rate policy

through next year with no need to signal tightening until 2021 as the U.S.

economy continues at trend pace, barring setbacks such as an intensification of

the trade dispute with China, Vincent Reinhart told MNI in an interview.

     "Right now the economy is in a good place," said Reinhart, who held roles

at the Fed over 24 years until 2007 including Director of the Division of

Monetary Affairs and Secretary and Economist of the Federal Open Market

Committee. "The Fed will not have to provide any more support."

     The economy will grow "in the neighborhood of 2%" and unemployment and

inflation will move "sideways to a touch higher", so long as a mooted phase-one

trade deal with China is approved.

     "[The Fed] can sit on the sidelines for 2020, assuming sustained economic

growth, assuming an even longer economic expansion," Reinhart said. "The Fed

doesn't have to start signaling tightening until 2021."

     But he added: "The outlook unfortunately depends on an assumption about the

political economy. We think that the rational actor theory will prevail, and

it'll be in the interest of President Trump and President Xi to cut a deal."

     -- POLITICAL ECONOMY RISKS

     Reinhart remained confident about 2020 but stressed that precise estimates

of activity are of little use at a time of significant and hard-to-quantify

political risks, involving not only China-U.S. trade, but the possibility that

Washington might impose tariffs on auto imports from the EU.

     "There's a lot of 'ifs' when you're talking about 2020."

     "I don't hang a lot of the forecast on the idea that trade uncertainty goes

down a lot because it will be an important election - the campaign issue,"

Reinhart said. "Keeping alive a part two trade deal would allow President Trump

to run on a campaign plank of 'I brought China to the table. I'm the one who

should finish that process.' But at the same time, I think he rattles the cages

on auto tariffs."

     "What I worry about is we don't get closure, right? So, the Nov. 13th

deadline [on Section 232 auto tariffs] comes and goes and we get another

extension, and the President campaigning in the Midwest next year talks about

unfair auto trade."

     -- NO CUTS TO KEEP UP WITH FALLING NEUTRAL RATE

     Suggestions of lower real neutral interest rates, including a recent paper

by well-regarded Fed Board economist Michael Kiley, who argued it had fallen to

-1%, will not prompt a cut in 2020, Reinhart said. The neutral rate is the

unobserved rate that would neither stimulate nor dampen the economy.

     "The Fed's not going to act on a particular estimate unless it sees

evidence that persuades it. What would make the Fed ease? Not that somebody says

the new neutral rate was negative, but rather observing that they're not getting

nearly as much growth as they expected, given the low level of the actual rate

now."

     "They're not going to act anytime soon. They think they're about at the

right place." Reinhart said.

     -- WAITING PATIENTLY FOR INFLATION

     After the FOMC cut its policy rate for the third time this year to a band

of 1.50% to 1.75% Oct. 30, Chair Jerome Powell indicated potential rate hikes

would depend on a "significant move up in inflation that's persistent."

     "I think we'll be waiting for a while," Reinhart said, noting the lag

between output gaps and inflation.

     "One thing to note is we have been too impatient about expecting inflation

to rise," Reinhart said, noting the flatness of the Phillips curve.

     "Unit labor costs are going up. That's going to show up in inflation. That

ultimately will be what gets the Fed to move. But they're going to have to see

it convincingly above 2% on their preferred measure."

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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