MNI INTERVIEW: Fed Likely Pushing Back 2025 Cuts - Lockhart
MNI (WASHINGTON) - Heightened policy uncertainty is likely to see the Federal Reserve push back additional easing until the second half of the year, and that may mean two or fewer cuts for 2025, former Atlanta Fed President Dennis Lockhart told MNI.
"The committee's emphasis on ‘patient’ signals they believe it may take several months to get greater clarity of what’s happening and become convinced of what the data are signaling. It would suggest to me that if there are cuts, they would likely be in the second half," he said in an interview.
In the FOMC's December projections, 10 officials favored two cuts – the median for 2025 – and five penciled in more than two. "I can imagine because of uncertainty and some tariff-driven upside inflation risk, that a certain number of people shift to fewer than two cuts and some of the doves shift to two,” he said.
"So it could be an increase in the number of dots at two, but I can also see a scenario where two cuts and one are evenly split.”
INFLATION NOT WORSE
The Fed lowered its benchmark overnight rate by 100 basis points last year to 4.25%-4.5% before pausing in January. A May resumption of cuts looks unlikely at this point, and even June is tenuous, Lockhart said.
The latest data on inflation is "ever so slightly encouraging," he said. CPI and PPI in February came in weaker than Wall Street had expected, though the Fed's preferred PCE inflation measure is likely still firmer than officials would like to see.
"They can sit on this inflation situation I’d think for a while to see how the risk elements play out," Lockhart said.
"I don’t rule out they could act as early as June, but that would probably tell you that the employment picture is worsening at a pace that’s faster than expected."
PARADIGM SHIFT
The Fed’s working assumptions about the path of the economy have been overtaken by doubt and contingencies in the current environment of confusion and mixed signals on trade policy, Lockhart said.
President Trump has imposed and delayed tariffs on Mexico and Canada and threatened to match U.S. tariffs on all those imposed on it, and China, Canada and the European Union have either announced or imposed retaliatory duties.
Federal government layoffs and funding cuts have yet to show up in hard data, but recession fears are in the air. The Atlanta Fed's GDPNow measure currently estimates growth for the first quarter at -2.4%, a dramatic divergence from the 2% Blue Chip estimate.
"It’s a red flag. Not so much the absolute number but the rather dramatic move to a negative growth picture from a positive one," Lockhart said. Likewise, a nosedive in consumer sentiment is "contributing to a picture that’s changed radically in the last few weeks." (See: MNI INTERVIEW: Inflation Expectations Worrisome For Fed- UMich)
"The soft landing that has been happening could continue, but it feels like a potential paradigm shift," he said. Still, "both the employment and inflation conditions are acceptable enough that the right posture is simply to wait and see."