MNI INTERVIEW: Fed Likely To Hike 50-100BPS More, Gagnon Says

Federal Reserve officials could take a breather from interest rate hikes at next week’s meeting, but that won’t stop them from tightening monetary policy by at least another half and possibly a full percentage point, Joseph Gagnon, a former senior economist at the Fed Board of Governors, told MNI Thursday.

Inflation has been more stubborn than expected, and while it should let up enough by year-end to give policymakers comfort, recent strong data will keep the Fed on track for additional rate increases.

“The data over the past few months has gradually pointed towards maybe a few more hikes, maybe 50 basis points or so, I wouldn’t rule out 100 basis points,” Gagnon told MNI’s FedSpeak podcast.

“There’s no rush and they can afford to take their time. But based on the data at hand I might personally support a 25 basis point hike now. Of course there will be CPI data and that could change things.”

HAWKISH PAUSE

CPI figures for May are due on the first of the Fed’s two-day meeting on June 13-14, but market participants still see a high bar for a June hike after top officials like vice-chair-nominee Philip Jefferson hinted strongly at a desire to skip a meeting.

“A pause is certainly possible, but I think if they pause they’re going to indicate a very significant chance that they would hike at the next meeting, so it’s not going to be signaling a stop,” said Gagnon.

FOMC members' interest rate projections, which accompany the quarterly Summary of Economic Projections, could also point to higher rates down the line.

“The dot plot reflects the outcome of individual people’s perceptions so they don’t have any joint control. I think it would drift up but with a lot of dispersion,” Gagnon said. “In March there was a huge majority all lined up for the peak being where they are now, but almost all the people that didn’t agree with that were on the high side. So it wouldn’t take much, only two people I think, to raise the median.”

RISING CHANCE OF DISSENTS

The chances of a Fed dissent, which has not occurred in almost two years, are rising now that the policy calculus is becoming more difficult, he said. (See MNI POLICY: Fed Most Divided Since Start of Hikes, More Loom)

“We’re really in an area where there could likely begin to be dissents just because it’s not so clear how to read the data, and they have been surprisingly unified so far,” he said.

Still, despite some possible bumps along the way, Gagnon is optimistic that inflation will come down substantially by year-end – especially when measured on a three- or six-month basis – and do so without a major spike in unemployment.

“I think that they don’t need much of a rise in unemployment, maybe half a percent to 4% or the low fours and that’s all they need. If they can get unemployment in the range of 4%-4.5% then wage inflation will go down a tick more next year and we’ll be on a glide path to something they could live with. That would definitely be a soft landing.”

HIGHER INFLATION TARGET

Gagnon said he still supports the idea of eventually raising the Fed’s inflation target to 3%.

“Already inflation in the news is way down from where it was a year ago. And it’s still above 4.5%. That says to me that by the time we get to 3% it’s just not going to be an issue with the public anymore, and that encourages me to think that a target of 3% would not be a problem,” he said. (See MNI POLICY: Fed To Consider Shift to Inflation Target Band)