MNI INTERVIEW: Fed Laying Groundwork For Rate Cut Pause-Lacker

MNI (WASHINGTON) - Federal Reserve officials appear to be gradually shifting their views to acknowledge that strong recent economic data call for less monetary easing, laying the groundwork for a pause in rate cuts in the coming months, former Richmond Fed President Jeffrey Lacker told MNI. 

Even before policymakers take into account the likely inflationary impact of some of President-elect Donald Trump’s proposals to boost tariffs and rein in immigration, a robust economic backdrop and lingering inflation pressures have prompted a notable shift in tone, Lacker said. 

“The tone of the data has been that inflation has stopped coming down, wage pressures remain, and the economy continues to surprise on the upside on the real side with stronger GDP growth, stronger consumer spending, stronger employment growth than expected earlier this year,” Lacker said in an interview. 

“They overestimated real weakness. They need to take a pause.”

HIGHER NEUTRAL

Fed officials have been indicating they believe neutral rates have risen, which would also call for a less aggressive, more cautious approach toward lowering interest rates, said Lacker. (See MNI INTERVIEW: Fed Cuts To Continue But Neutral Not Far-Tracy)

“Powell was very careful at the last press conference to portray them as uncertain about how restrictive policy is, and in some sense feeling their way – we’ll do things and see how the economy behaves,” he said. 

Fed Chair Jerome Powell echoed his colleagues’ caution Thursday, calling for a cautious approach and even nodding to the possibility of slowing rate cuts as the Fed approaches neutral. 

Indeed, Lacker noted the Richmond Fed’s estimate of r-star, or the real neutral level of interest rates, at 2.6% would imply a nominal rate of 4.6%. After last week’s quarter point cut, the Fed funds rate stands in a range of 4.5-4.75%.

“They’re already there,” he said.

TRUMP INFLATION

This shift comes even before any possible inflationary effect from policies of the new administration, which are fairly widely expected and reflected in higher bond yields. Some economists have argued the Fed can look through tariff increases as a one-time shock but Lacker downplayed that prospect. (See MNI INTERVIEW: Fed Could Pause As Prices Spike in 2025-Gagnon)

“I would expect tariffs to provide an inflationary impulse,” Lacker said. “Our experience with one-time oil price increases in the 70s was that they had the capability of being passed through and generating a longer run impulse to inflation,” he said. 

The prospect of ever larger fiscal deficits also raises the specter of higher prices, Lacker said, and helps explain the recent selloff in the bond market. 

“Holders of bonds are realizing that the bonds they hold are going to have lot of new friends coming to market. The natural thing is for yields to adjust now, ahead of that,” he said.   

FED INDEPENDENCE

Lacker said threats to Fed independence comes in many forms, but it should not be taken lightly. Trump has previously said presidents should have “at least a say” on rate policy. 

“There is going to be pushback from both the political system and from the financial and the business world – that will limit the extent of White House interference on the Fed,” he said. “Having said that, I don’t think that will eliminate or completely suppress the White House’s desire to influence the Fed.”