MNI INTERVIEW: Fed Could Cut Rates As Early As Q1 - Weinberg

The Federal Reserve could start reducing interest rates as early as the first quarter of 2024 if the recent steady decline in inflation continues, former Richmond Fed research director John Weinberg told MNI.

“If for the rest of this year and the first month of 2024 we continue to get core inflation prints that round to 0.2% on a monthly basis, then that’s a good long run of well-behaved inflation,” said Weinberg in an interview. “By the time you get to the end of the first quarter – maybe that’s when they could begin to think about it.”

Still, he cautioned that negative inflation surprises would shift that timeline back. “Every time you get a bump in that path, it pushes it out, maybe by more than one month.” (See MNI POLICY: Fed Likely Done, Focused On Length Of Hold)

Weinberg said the Fed will likely be more cautious and gradual about cutting interest rates than in past cycles, because it’s coming from a place of high inflation, which hit four-decade highs in the middle of last year.

MEASURED PACE

“The Fed in the 21st century has been all about doing things at a measured pace, and cautiously, they’ve taken smoothing to new levels. So I would expect them to be cautious about removing restrictiveness in the policy rate,” he said, adding that the chances of a soft landing look good at the moment.

The October PCE report showed an annual gain of 3% in headline inflation and 3.5% for core prices, which rose 0.2% on a monthly basis. Policymakers need to make sure progress continues all the way back to the 2% target in order to prevent inflation expectations from becoming entrenched above target, Weinberg said.

“Once inflation has found a trend, that looks like it’s kind of wired into the way people are thinking about things. That’s really more of a situation where moving inflation requires a monetary policy shock,” he said.

At the same time, a hard landing would call for the Fed to get policy into accommodative territory rather than simply adjusting it lower in order to keep real rates constant and avoid tightening financial conditions further.

“If the economy deteriorates you would expect the Fed to respond with alacrity,” he said. “If it looks like we’re on a soft landing path and inflation has settled at a place the Fed is happy with, I would expect they’d move slowly. If inflation appears to be persistently lower than the real rate is higher.”

INFLATION TARGET BAND

While policymakers should not give up their commitment to reaching 2% inflation, Weinberg said there is a valid debate around whether a target band might not be more appropriate.

He noted inflation hovered closer to 1.5% for most of the period after the 2012 adoption of an official 2% target, that is until the Covid supply shock coupled with hefty fiscal and monetary stimulus led to a renewed surge in costs.

“The virtue of stating things in terms of a range is it recognizes the difficulty of fine-tuning inflation,” he said. “Maybe it’s not such a crazy idea.” (MNI POLICY: Fed To Consider Shift To Inflation Target Band)