MNI INTERVIEW: Fed Might Not Cut Rates Until 2025-Swanson

The Federal Reserve is likely to wait at least through the end of this year and possibly until 2025 before cutting interest rates because inflation could remain too high for comfort, former senior San Francisco Fed staffer Eric Swanson told MNI.

“If inflation is sluggish coming down, and it has been sluggish for most of the year, then they might just do one cut in December or maybe not, maybe wait until January or February, depending on how the data comes in. That's totally possible,” said Swanson, who spent some 16 years at the SF Fed. (See MNI INTERVIEW: Good Chance Fed Won't Cut Rates In 2024-Plosser)

It is hard for the Fed to look through housing inflation, which is taking longer to ease than officials expected, even if officials believe it is unduly boosting headline consumer prices, Swanson said in an interview.

“The problem is, you get into communication problems – it sure seems like you're sort of moving the target,” he said.

“Rents are so sticky and they’ve been coming down slowly. And some of the stickiness is built in the way the CPI and PCE are constructed, they have rents being very sticky by design.”

SOFT LANDING

Despite the Fed’s need to stay higher for longer, the economy is probably well on its way to a soft landing, Swanson said.

“We're at the point where they've gotten a lot of the soft landing down, and they're just trying to, now, kind of finish off the last mile of it … I don't think they need to spike the unemployment rate,” he said.

“They can probably just maintain the tightness they've got. That will continue to put a little bit of downward pressure on demand and that should carry them through. I think they could just hold rates where they are for months and that would be sufficient.”

MORE DOTS

Swanson, who spoke at a recent Brookings Institution conference on the Fed’s framework review, said he is a big fan of the Fed’s quarterly dot plot projections, which have come under some scrutiny following the call for more scenario-based forecasting made by former Chair Ben Bernanke in his report into Bank of England forecasting.

“I like the SEP, the dots, I personally think that it’s very very useful. I argue they should do it at every meeting,” he said.

Still, Swanson said the press focuses too much on the median dot, which does not take account of the outsized influence of top officials like Fed Chair Jerome Powell and New York Fed President John Williams, who is also FOMC vice chair.

He said the Fed’s last framework shift, which called for an asymmetric response to shortfalls in employment, was a clear mistake and should be reversed.

The central bank could also consider shifting to an inflation target range to acknowledge the inherent impreciseness of inflation fluctuations and monetary responses to them.

“The Fed seemed to get very concerned about small misses when they were undershooting. If they had a little bit more of a band, it might have encouraged them not to take the minor misses so seriously,” he said. (See MNI POLICY: Fed To Consider Shift To Inflation Target Band)