MNI INTERVIEW: Fed Can Wait Until Summer To Cut Rates-English

The Federal Reserve will likely wait until summer before cutting interest rates, but policymakers could adjust their post-meeting statement next week to open the door to a reduction in March should the economic data call for it, former Fed board economist William English told MNI.

English is expecting three rate cuts in the year, likely starting in June or July: "One in the summer, one in the fall, and one at the end of the year," he said in an interview. (See: MNI INTERVIEW: Fed Likely To Wait For June To Cut - Carpenter)

Still, policymakers could adjust the statement language in order to better position themselves for the possibility of cuts, he said.

The FOMC "could soften its language on inflation a little bit and they could make the discussion of the future path of policy essentially neutral, not still pointing towards policy firming," said English, the former director of the Fed's division of monetary affairs.

"I don't think they'll want to signal in any way that they're definitely on track to cut rates, say, in March, but they could acknowledge that inflation has come down, they feel a bit better about the outlook, and that the next direction of policy is likely to be down, not up."

INFLATION RISKS

Risks to the Fed's dual mandate are balanced, he said, a change from six months ago, but the threat of a resurgence in inflation remains, he said.

"On the one hand, there's still reason for concern that inflation stabilizes at a level that's too high and they haven't really gotten the job done. But there are also real risks that as the economy slows it reaches a stall speed and abruptly slows a lot," English said.

"If the economy kind of stays where it is, with an unemployment rate around 4% and positive growth, there's a risk inflation flattens out around around 3%. The Fed is wary of that and so as a matter of risk management they're inclined to keep policy tight for a while longer just to make sure that inflation stays on a downward trajectory."

English, a former secretary to the Federal Open Market Committee, suggested there is little risk to waiting before starting rate cuts.

"The models I know of suggest that shifts in timing of a few months just aren't all that relevant to the outcome to the economy. The lags are such and the uncertainties are such that that's kind of lost," he said. "Unless the outlook somehow changes sharply, a couple of months don't matter for the timing of rate cuts."

LONGER QT

It is also appropriate for the Fed begin more thorough discussions about potentially slowing the pace of Treasuries running off its balance sheet to avoid any disruption to money markets. (See MNI: Fed Could Soon Taper QT But Halt Further Off-Ex Staffers)

"If you move a little more slowly, you may be able to go further because everybody will adjust and there's more flexibility," said English, now professor at Yale University. "It seems like it's about time to have the discussions, even if you decide in the end that you don't need to do anything for another several months."