MNI INTERVIEW: Fed Likely On Hold For Most Of 2025-Kroszner
MNI (WASHINGTON) - The Federal Reserve has entered a holding pattern on interest rates that could last well into the second half of the year because of bumpy inflation readings and heightened policy uncertainty, former Fed board governor Randall Kroszner told MNI.
“They are minded to be moving down rather than be moving up. But also, that’s not coming any time soon,” he said in the latest episode of MNI’s FedSpeak Podcast. (Listen here or here.)
“The labor market is still robust, demand is still robust, we’re looking to see what the policy changes will be from the new administration. Those are coming fast and furious, it’s going to take a little while for the dust to settle to see exactly what those moves are and what the implications for the economy will be.”
Kroszner thinks the Fed’s optimism that inflation will continue to come down is well founded, but might not materialize in time to deliver the rate cut that markets are currently pricing in for June.
“I wouldn’t be heavily on that. We’re still seeing a reasonable amount of robustness in the labor market. You’re still seeing a lot of optimism overall in markets,” Kroszner said. “It’s not going to be so clear in the very near future and the Fed is in a position where they are okay to wait.” (See MNI INTERVIEW: Fed Likely On Hold Through 2025-Croushore)
The Fed last week kept the fed funds rate on hold in a range of 4.25-4.5%, and Chair Powell signaled the FOMC is in no hurry to cut further until it sees more progress on inflation.
MULTIPLE SCENARIOS
Kroszner said policymakers are likely engaged in extensive scenario analysis given the range of proposals coming out of the Trump administration.
On the one hand, the proposal to deport millions of undocumented immigrants could upend labor market dynamics in an inflationary fashion, said Kroszner, also a former member of the White House Council of Economic Advisers.
“If the deportations pick up speed that’s likely to tighten labor markets and put more pressure on wages,” he said.
As for tariffs, he noted there is still little clarity on their extent, timing and potential length.
“Will they happen? Will they have an inflationary effect? Will it be a one-off effect? That’s still really tough to know right now.”
At the same time, the prospect of lower taxes could supercharge an already-impressive growth record, Kroszner added. The mix of policy possibilities means inaction is the path of least resistance for Fed officials, and will likely remain so through most of the year.
“They’re very much in wait-and-see mode right now, thinking that inflation will be gradually coming down. Most FOMC members believe the current stance is still a tight stance and not a neutral stance, so as inflation gets closer to the 2% they’ll want to be getting closer to neutral,” he said.
FRAMEWORK REVIEW
Kroszner, currently an external member of the Bank of England’s Financial Policy Committee, said the FOMC would do well to consider discussing financial stability issues in its framework review around monetary policy.
He believes a lack of clear separation between the financial stability function of the bond purchases executed in the wake of the pandemic and their extension into the recovery created a blind spot that arguably led policymakers to miss the oncoming inflation surge.
“That’s exactly where one of the failures came and allowed the Fed to pursue a very loose policy that generated or at least was an important contributor to the inflation that we saw,” he said. “When the markets stabilized, they didn’t say, we just have to focus on monetary policy and we don’t need to be buying assets at six times the pace we did in the financial crisis.”