MNI INTERVIEW: Fed Likely Overtightened-Ex-Boston Fed's Fuhrer

The Federal Reserve has probably already gone too far in raising interest rates but officials could still hike further because they have set a low bar for doing so, former Boston Fed research director Jeff Fuhrer told MNI.

Fuhrer said the economy and the job market are likely to suffer from the Fed’s excessive tightening, which neglects the fact that inflation is already headed in the right direction.

“The pause was better than an additional tightening, that’s the good news, but it’s not what we needed. I think it’s fair to say that up to date, cumulatively, they’ve overdone it a bit,” he said in the latest episode of MNI’s FedSpeak Podcast. Fuhrer said the inflation trend is highly encouraging.

"I think the underlying rate of inflation today is around 2.5-3% and I think it’s going down for both the PCE and the CPI. That means inflation is going to continue to decline gradually from where it is," he said. (See MNI POLICY: Softer Trend Inflation Boosts Case For Fed Pause)

The Fed last week left interest rates on hold at a 22-year high of 5.25-5.5%, but penciled in another rate increase for this year while reducing the number of cuts in 2024 to two from four.

“What I hope is that they’re willing to back off later this year and maybe into next year. And I know that’s not what they’ve penciled in into the latest SEP forecast, they’re going in the other direction. But I hope they’re going to be data dependent and if I’m right about which way the data is going to go, I hope they change their minds later and get a little less hawkish," he said.

LOW BAR TO MORE HIKES

Fuhrer said the Fed has set a low bar for additional rate increases, and could very well raise them further if inflation progress appears to wobble.

“It’s entirely possible. There wasn’t loads of dispersion in the SEP around doing additional tightening, I think a lot of people will sign up to that, especially the voting members. I wish the bar were higher but I think it’s relatively low, especially if we get just a month or two of data that runs against their desired trajectory.”

The August CPI was one such bump on the road, showing a larger than expected 0.3% gain in core consumer prices that took policymakers and investors by surprise.

HAWKISH FORWARD GUIDANCE

A lack of confidence in further disinflation was enough for the Fed to even more firmly entrench its higher for longer message in the latest Summary of Economic Projections.

“They’re using the SEP and some of their language to try to shape expectations a bit. I think they were looking at the constellation of asset prices, interest rates and so on and saying maybe they don’t believe firmly enough that we’re going to tighten and remain high,” said Fuhrer. (See MNI INTERVIEW: Fed Defacto Hiked Via SEP, Maybe Too Much-Sahm)

“So let’s undertake this communications offensive to make sure that they do and I think – mission accomplished. Ten-year rates are up quite a bit in the last month. So for those who didn’t believe, I think they do now.”

DATA BLACKOUT

As a government shutdown looms, Fuhrer said the Fed would look for ways to work around the possible absence of key data releases like the CPI and the monthly payrolls figures, but added that the vacuum could hamper policy decisions.

“I don’t think fundamentally that the call should be made based on just one data release anyway, But I do think the Fed might put some weight on particular data releases because they’re trying to gauge whether they’ve gone far enough or need to go further,” he said. “So that could rest on one or two data releases. It’s a bit of an inconvenient time.”