MNI INTERVIEW: Fed Cuts Likely Delayed Till November -Lockhart

The case for three Federal Reserve rate cuts this year is weakening after three consecutive months of sideways inflation data and officials are likely to push back the timing of the first move to November at earliest, former Atlanta Fed President Dennis Lockhart told MNI.

The FOMC last month was nearly evenly split between those forecasting three and two-or-fewer cuts. But after core CPI posted its third straight 0.4% increase in March and the three-month annualized core non-housing services, or supercore, category jumped to over 8%, Fed Chair Jerome Powell said it was “appropriate to allow restrictive policy further time to work.”

The PCE inflation measure, preferred by the Fed, is running lower than CPI but also remains elevated and increasingly looks sticky, Lockhart said. Three-month annualized core PCE inflation accelerated to 4.4% compared to the 12-month rate of 2.8%, according to Bureau of Economic Analysis data Friday.

"With each disappointing or ambiguous report, the time needed to gain confidence that the trend is toward 2% is pushed out. The clock resets, so to speak. It takes three or more months of very convincing reports to get that confidence, Lockhart said in an interview. "September is questionable."

DOING NOTHING NONZERO PROBABILITY

U.S. elections taking place just two days ahead of the November FOMC meeting are not likely to constrain the Fed's policy choices at that meeting, Lockhart said. But Powell could lean toward holding off until December or taking a breather after a November cut due to a desire to avoid a policy error, he said.

"The Committee could cut in November, if deemed appropriate, or wait until December if financial conditions are volatile around the election. And a sequence of successive cuts is not at all certain," he said.

"There’s a scenario of being cautious on the way down. That might see them executing a cut and trying to prepare markets for the idea that they will wait and evaluate before cutting again -- so cut in November and no move in December or skip November and cut in December," Lockhart said.

Doing nothing this year is also a "nonzero probability," he said. (See MNI INTERVIEW: Risk Next Fed Move Is A Rate Increase - English)

"In next week's press conference, Chair Powell is likely to discourage the view that a rate hike is possible but won’t completely dismiss that possibility. It’s a time to keep options open." (See MNI INTERVIEW: Kaplan Says Loose Fiscal Is Holding Up Fed Cut)

SOLID LABOR MARKET

The Fed's disinflation narrative cannot yet be abandoned, Lockhart said. The inflation data have been bumpy, which officials had been anticipating. Despite weaker GDP growth in the first quarter, consumption and domestic demand stayed strong and labor market data have been solid, he said.

To the extent rising labor costs are a key driver of sticky services inflation, some weakening of the unemployment rate or a pick up in layoffs would help dampen underlying inflation pressures, Lockhart said.

"A few weeks ago we were beginning to talk about the equivalence of the two sides of the mandate and paying attention to the risk of unemployment rising. It’s shifted back again," he said.

"The labor market is not the problem. It's inflation going sideways that's the problem, and the labor market gives them some ability to be patient and focus on inflation."