MNI INTERVIEW:Fed Might Not Cut At All In '24-Ex-Fed Economist

Stubborn price pressures could prevent the Federal Reserve from lowering interest rates this year as the economy remains strong and officials worry about easing prematurely, ex-Philadelphia Fed economist Dean Croushore told MNI.

Markets have gotten way ahead of themselves by pricing in as many as six quarter-point rate cuts this year, he said, adding investors are engaged in wishful thinking about how dovish the U.S. central bank will actually be.

“The Fed might not cut at all this year. I think we’ve got a ways to go on inflation and it’s going to be stubbornly slow,” he said in an interview. “There are a lot of people like myself who are pretty skeptical about that and think inflation tends to be pretty sticky. It’s come down a lot this year because we resolved some of the demand-supply imbalances.”

Housing is one particular area of concern, Croushore said. Policymakers have been counting on shelter inflation to begin letting up but the latest CPI report showed it still accounted for more than half the overall gains for December.

“There’s some stuff in there that’s going to be hard to bring down – like housing overall is going to be tough,” he said. “There’s just a persistent shortage of housing units and it’s not clear how fast we can build them.” (See MNI INTERVIEW: Fed Could Hold Longer On 'Entrenched' Inflation)

Core inflation is generally “pretty stable” at levels still well above the Fed’s target, he said, and the CPI figures suggest a still-long road ahead to get inflation safely back to 2%.

SOFT LANDING

Another factor that will make Fed officials reticent to reduce borrowing costs too soon is that the economy looks set to remain strong despite last year’s inflation decline.

“In the absence of some shock I don’t see a hard landing coming. People keep saying the Fed’s never pulled off a soft landing,” said Croushore, who spent 14 years at the Philly Fed as economist and vice president.

“I think in the 1990s for sure and in the 2000s for a while there were lots of them. They’ve done this before – maybe not with inflation kicking up so big but that’s just because inflation hasn’t been that high.”

Ongoing support from fiscal policy even amid a strong economic backdrop is another factor that could keep inflation buoyant, he said. “It doesn’t look like we’re any closer to solve the fiscal problem, so that’s going to continue to stimulate the economy going forward.”

Still, Croushore is not concerned about some kind of wage-price spiral. “I’ve never been been a big believer in cost-push inflation, more of a believer in wages catch up to costs over time.”

QT

Croushore said it’s still too early for Fed officials to begin slowing the pace of balance sheet reduction but added the discussion will become more relevant soon, as market liquidity begins to show signs of adversity.

“We don’t know what the optimal level of the balance sheet is. We thought we were pretty close to that in 2019 when interest rates started to shoot up a little bit. I think they have to get quantitative tightening until we get to a point like that,” he said.

“Maybe we’re getting there, I think it’s too early for the Fed to seriously talk about it, but if we start to see the kinds of things we saw in 2019 then that might be a good clue that they should stop.”