MNI INTERVIEW: Ex-Fed's Kroszner Sees Fed Pause After Dec Hike

By Pedro Nicolaci da Costa

     WASHINGTON(MNI) - The Federal Reserve will pause its cycle of interest rate

rises after another expected increase next week as it assesses the impact of

recent tax cuts and the domestic effects of slowing global growth, former Fed

governor Randall Kroszner told MNI in an interview.

     "They will take a pause" after pushing benchmark rates a quarter-point

higher to a range of 2.25% to 2.5%, said Kroszner, a professor at the University

of Chicago's Booth School of Business, who served as a Fed governor from 2006

until 2009.

     "They wanted to get near the so-called neutral rate. Once you get to 2.5%

I'd say most people in the Fed say you're in the realm." The neutral rate of

interest is one that neither stimulates growth nor retards it.

     "I don't think they know how long they want to pause. They will become more

data dependent," he said. The Fed is likely to signal such dependence in a shift

in its statement language next week.

     Business investment, which the Fed specifically flagged in its November

policy statement as a sign of weakness, will provide one key guidepost for how

long the pause lasts, or whether further rate increases are needed at all,

Kroszner said.

     There is disagreement among policymakers as to whether the Republican tax

cuts will merely act as a short-run sugar high or whether they might have

longer-run benefits for investment.

     --REASONS FOR CAUTION

     Then there are worries about growth overseas, Kroszner said. Europe's

economy is slowing just as the European Central Bank is planning on winding down

its own asset purchase program, while there are significant doubts about China's

growth rate and the fate of other emerging economies.

     Lastly, there is the trade war. So far, Kroszner said, trade tensions have

not had a major impact on U.S. economic growth, given its strong reliance on

domestic consumption. Still, he said uncertainty could weigh over time, and

provides the Fed with an additional reason for caution.

     The Fed has gradually pushed interest rates higher since December 2015,

having left them at zero for seven years in response to the Great Recession of

2007-2009.

     Market expectations for Fed tightening have shifted drastically in recent

weeks after a fairly dramatic change in tone from Fed Chairman Jerome Powell and

some of his colleagues. Futures markets went from pricing in significant

additional tightening next year to barely anticipating next week's hike.

     MNI reported exclusively last month that the Fed would likely pause rates

hikes in early spring.

     "They need a little bit more time to figure out how the economy is

evolving," Kroszner said.

     Looking further ahead, Kroszner said the Fed would likely adopt some

changes to its inflation targeting framework sometime next year, in part to

account for the lack of price pressures despite a low unemployment rate, a trend

that has confounded officials. Kroszner said policymakers are also grappling

with how to better incorporate financial risks and variables into their economic

forecasting models.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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