MNI INTERVIEW:Fed Could Need To Hike Again After Pause-Ireland
Ex-Richmond Fed researcher sees a slim chance for a soft landing if FOMC is careful.
The Federal Reserve is no longer behind the curve on inflation but persistent price pressures could force the central bank into further interest-rate hikes later this year after an expected pause, ex-Richmond Fed economist Peter Ireland told MNI.
“Now FOMC members as a group feel like they’re on top of the problem and that gives them the luxury of going back to a gradual approach,” said Ireland, a professor at Boston College, in an interview with MNI’s FedSpeak podcast Thursday.
“I definitely believe at least a couple more rate increases are needed. I’m concerned that additional rate increases may be necessary in the summer and in the fall but we’ll just have to see,” he said.
Chair Jerome Powell told reporters Wednesday the Fed has in the past alternated between pauses and hikes and noted Canada's central bank recently signaled a pause with the potential for a future increase if inflation remains hot. The Fed's 25bp move matched the smallest in its cycle delivered back in March of 2022, and Powell mentioned the prospect of “a couple” more rate hikes, a shift Ireland welcomes as a return to normalcy in the conduct of policy.
Gradual tightening reduces the chance of overdoing it or under-tightening, Ireland said, adding that the current policy stance should be considered “somewhat restrictive.”
SOFT LANDING RARE BUT PLAUSIBLE
The Fed's policy rate is now 4.5%-4.75% compared with policymakers' preferred PCE measure that's eased from a summer peak to 5% and 4.4% excluding food and energy in the year to December. “On balance the news is quite good," said Ireland.
Nominal GDP figures are an important way to gauge the Fed’s progress on inflation and that is also showing good progress, he said.
“Nominal GDP growth was in double digits a year and a half ago, it’s decelerated significantly,” he said. However, “it’s still running about 7 to 7.5% year-on year which is not consistent yet with a full return of inflation to the 2% target.”
(See MNI: Fed Able To Tolerate Above-2% Inflation, To Keep Target)
The Fed is hoping for a soft landing but has failed to adequately explain to markets and the public how it would react if such a positive outcome fails to materialize, Ireland said. Some investors are also betting the Fed will cut rates late this year as the economy stumbles, and Powell said he doesn't see things coming to that.
History suggests soft landings where inflation comes down without a spike in unemployment or a hit to output are extremely rare, Ireland said. Still, he said unique conditions in the post-Covid labor market including ongoing shortages in key sectors indicate today's environment is unique.
RECESSION RISKS LINGER
“Achieving a soft landing is a very difficult task. What are the odds this time based on what we’ve seen in the past? Very very low,” he said. “On the other hand, there is a real sense that this time is different. We’re not seeing any indication of a break in the labor market at the aggregate level.”
“Could it be that we muddle through this without a serious recession? Despite the fact that I look at history and it makes me pessimistic, it doesn’t seem crazy to me.”
Either way the path is narrow at best, because continued strong growth and inflation might force the Fed to tighten more than it intends.
“What happens if we get into the fall and into next winter and stubbornly core measures of inflation remain elevated, say, around 4%?” said Ireland. “That’s the scenario where the Fed is going to have to continue to raise interest rates. The probability of sending the economy into recession goes up even more.”