MNI INTERVIEW: Fed Cuts Timeline Pushed Back - Reinhart

The Federal Reserve is likely to cut interest rates once this year in December, and if inflation remains sticky the central bank will delay easing further, Vincent Reinhart, a former director of the Fed's division of monetary affairs, told MNI.

The case for even two cuts this year is weak after months of sideways inflation data, and officials are likely to push back the timing of the first move to December, he said. In March the 19 Fed officials were nearly evenly split between two and three cuts this year, but firmer-than-expected inflation data have likely shifted the timing.

The FOMC statement Wednesday noted "a lack of further progress” in getting inflation back to its 2% target in recent months, an indication the Fed is rethinking the timing of rate cuts, Reinhart said. However the committee also noted risks have moved toward better balance over the past year, signaling it still thinks interest rates are at their cycle peak, he said.

"It is only delaying the eventual easing. I believe that the committee thinks for the next one and a half or two years the issue is about recalibrating the nominal funds rate to a lower rate of inflation so policy doesn't stay too restrictive -- to sustain expansion and get inflation back to the goal."

Additionally, officials may disagree somewhat on the level of current policy restrictiveness but overall they deem policy to be restrictive, Reinhart said. "They can compensate for the extent that it's restrictive now by how long they keep it there." (See: MNI FED WATCH: Powell Leans Into Higher For Longer, Not Hikes)

HIGH HURDLE TO HIKING

Powell and the rest of the FOMC are aiming to get inflation down as softly as possible so as not to harm the central bank's other objective of maximum employment, Reinhart said.

Powell is likely more optimistic about inflation than many of his colleagues and "easing policy sometime sooner than many of his colleagues would prefer is a way of ensuring sustained economic growth," he said.

If inflation in coming months remains at elevated levels as seen in the first quarter, Fed policymakers will raise the possibility of hiking again, Reinhart said. But "that's mostly spelling out the policy reaction function" and will be "cheap talk."

"The hurdle is extremely high," he said. "You heard it from Powell. It's how long you keep that restriction in place."

"If it turns out inflation is even more persistent or goes in the wrong direction, then you just keep policy restrictive for longer. The first line of defense would be rate guidance," he said. In that scenario, "they'll take out future eases."

ELECTIONS MATTER

U.S. elections taking place just two days ahead of the November FOMC meeting are likely to constrain the Fed's policy choices at that meeting, said Reinhart, who spent 24 years at the Fed.

"Our forecast is one and done in December," said Reinhart, chief economist at Dreyfus-Mellon. "Despite what Powell said, I do think the election matters." (See: MNI INTERVIEW: Fed Only Likely To Cut Once This Year - Giannoni)

"They should appropriately care about the public reception to their action and they should avoid acting at a time in which the public would be confused about their policy intent," he said. "They have a window to either ease well enough before or after, and that's June or December. And the data preclude June."