MNI INTERVIEW: Fed Done Hiking, Eyes Long Hold-Ex-IMF Official

The Federal Reserve is likely done raising interest rates because the economy is not as effusive as recent data suggest and the central bank has already done a lot to put inflation on a path back to its 2% target, former IMF economist Martin Muhleisen told MNI.

“I don’t expect that they will be in a position to raise rates again. I don’t think the economy has that strength in it, though people are still spending like crazy,” he said in an interview. “Without an increase in wages I don’t see this really as a big factor.”

Instead, the Fed is now focused on how long to keep rates at peak levels, and that part of the policy outlook is too data dependent for even officials to make any reliable predictions.

“As far as the need to stay on hold and see how things evolve, there you need some kind of crystal ball to figure it out,” he said. “The direction is toward a cut at some point but that could be quite a while.”

The Fed kept interest rates at a 22-year high range of 5.25%-5.5% last week, leaving the door open to an additional hike but setting a seemingly high bar for any such move. The rise in long-term bond yields to 16-year highs, while partly reversed in the last couple of weeks, is an additional factor that supports the Fed’s decision to “proceed cautiously” while it observers the evolution of data.

“They’re doing the right thing. They understand there are a couple of things helping them like long term interest rates, perhaps also the strong dollar. That helps them stay on hold and watch things,” said Muhleisen, who held several roles during his more than 27 years at the Fund, including chief of staff and director for strategy, policy and review.

WAGE PRESSURES

FOMC members will have to remain watchful of the lingering desire of workers to seek additional pay increases to make up for ground lost to several years of high inflation.

“My sense is that the ramifications of the shock increase in prices and the subsequent reduction in real incomes and living standards for a large part of the population, that’s going to affect labor markets for a while in the sense that there will still be pent up wage demands. That will make the Fed’s job a little bit more difficult,” said Muhleisen.

He said Congressional dysfunction is a wildcard for policy given the strong role the government's loose fiscal approach has played in keeping the economy buoyant. Still, Muhleisen does not see great scope for fiscal consolidation in an election year, even with a divided legislature.

“Part of this growth right now is the result of crazy fiscal policy and I don’t know what they’re going to come up with in the next couple of months with this House they have now,” he said. (See MNI INTERVIEW: 2024 Fed Hikes Possible On Fiscal Boost)

Still, while the increasing budget deficit and the surge in Treasury supply is partly responsible for the rise in yields, U.S. debt levels are still not close to reaching crisis levels.

“I think we’re still a bit away from that, which means there isn’t really much of an incentive to do much, which makes it much more difficult down the road,” said Muhleisen.