MNI INTERVIEW: Fed Can’t Let Guard Down On Inflation -Weinberg

Federal Reserve officials are making steady progress in the effort to bring inflation back to their 2% target, but must not ignore the risk that price pressures will stall at higher levels, former Richmond Fed research director John Weinberg told MNI.

“If inflation continues to look like it's wandering around in the greater than two-and-a-half percent range people might conclude that the Fed will tolerate that and once people conclude the Fed will tolerate that, that risks locking in trend inflation at a higher level," Weinberg, who spent some 15 years advising the Richmond Fed president and leading the regional bank’s research department, said in an interview.

“I do worry a little bit because simply talking about the trajectory of inflation from the point of view of statistical projection glosses over the interdependence between the trajectory of inflation and what the Fed does, and what people believe the Fed will do."

He said Fed Chair Jerome Powell’s remarks this week were not inherently dovish, as some market participants interpreted them, but rather a snapshot of his broad view of the path of inflation. (See MNI INTERVIEW: Fed Highlights Risk of Weakening Job Market)

CONFIDENT, NOT DOVISH

The press conference comments reflected his “confidence that the prevailing trend that we were witnessing in the second half of last year is going to continue.”

“I think he and other members of the committee would probably say if it doesn't, well, you know, that we'll do something different. And so in that sense, it's not dovish,” said Weinberg.

While he saw the Fed’s forecasts for inflation to keep falling as reasonable – the committee now sees core PCE ending 2024 at 2.6%, up from 2.4 in the December projections – he warned that contingency plans must also be in place for adverse scenarios.

It’s too soon to tell whether the neutral rate of interest has risen in the wake of pandemic forces that appear to have reshaped the world economy in many ways, he said.

“There could be reasons for equilibrium rates to be higher in the future on a steady state basis than they were pre-pandemic, although some of the things that we thought were keeping real rates low I think are continuing,” he said, sounding skeptical of any productivity revolution despite the recent gains.

MODERATELY RESTRICTIVE

Monetary policy is moderately restrictive, he said, adding that the best way to measure the level of tightness is the short-term real rate.

“I think of that as the stance of monetary policy relative to some notion of what’s neutral,” he said.

“When we talk about inflation dynamics, that’s a tricky thing because people talk about how inflation fluctuates around its trend, and it does historically – trend inflation has been pretty stable, fluctuations have been transitory,” said Weinberg.

“The pandemic episode was a stress test for that consistency and I don’t think we’re out of that episode yet, we’re not out until we know what trend inflation is coming out.”

The FOMC left interest rates on hold for a fifth meeting this week, at a 23-year high of 5.25-5.5%, and policymakers signaled they expect to cut borrowing costs three times this year.