MNI INTERVIEW: Fed Must Dampen Stagflation ‘Vibes’ - Roberts
MNI (WASHINGTON) - Federal Reserve officials should maintain a hawkish posture in order to ensure rising inflation expectations associated with tariff fears don’t become entrenched in consumer psychology, even if the levies themselves only partially materialize, former New York Fed executive Rick Roberts told MNI.
“I don't think much is going to come of this tariff stuff. The problem is if these expectations get embedded in the market, then fears can turn into reality,” he said.
Even without a possible boost from U.S. tariffs, core PCE inflation is already set to end the year around 2.7%, well above the central bank’s 2% target, he said. But if the tariffs do indeed come to pass, he thinks inflation will likely surge and force the Fed to reconsider its policy stance altogether.
“If tariffs materialize I could see inflation between a half point and a point higher even – maybe 3.5% on core PCE” by the end of 2025, added Roberts, a professor of economics at Monmouth University.
At the same time, a trade war would threaten an otherwise robust economic outlook. “If spending tanks because everybody's worried about these stagflation vibes, and we're going to slow ourselves down for no reason,” said Roberts.
The Trump administration’s sharp cuts to federal government jobs could also begin to affect private sector hiring. (See MNI INTERVIEW: Fed Nearly Done Easing Barring Slump-Benigno)
“That makes me nervous. Some of that may spill over and actually slow things down. Right now it’s tough to get a grip on how much of that is going to take place, but the impact on the market could be just as bad if those expectations are already entrenched,” said Roberts.
HAWKISH TONE
Against that backdrop, Roberts would like the FOMC to strike a hawkish note at this week’s post-meeting press conference. The Fed is widely expected to hold rates steady at 4.25-4.5% while its March SEP is likely to pencil in just one or two cuts for this year. (See MNI: Fed SEP To Show 2 Or Fewer Cuts, Two-Sided Economy Risks)
“I hope this combination of the policy statement, the SEP and the press conference is overall viewed as hawkish,” he said.
Roberts said a benign CPI for February “is probably not going to translate into a softer PCE. In fact PCE is likely to go the other way.”
Roberts thinks the SEP could show a median of just a single cut while GDP is revised down to 1.9% from 2.0% and inflation projections are bumped higher. (See MNI INTERVIEW: Fed To Cut Just Once Due To Tariffs-Carpenter)
BANKING RISK
Roberts, also a former Kansas City Fed economic advisor, said he’s concerned the U.S. banking system is still plagued by many of the problems that caused the SVB-led turmoil of March 2023.
“The other thing that’s out there is this banking risk, commercial estate. There’s a lot of stuff that’s coming due for refi and a lot of those banks have unrealized losses on their Treasury securities,” Roberts said.
“To the extent that they need to turn those into realized losses to meet the outflow of uninsured deposits that will fly with the first sound of a problem, they're going to need to liquidate some assets at a loss to their capital. So that's a potential banking problem out there, but I assume the Fed's on top of that. I just don't hear many people barking about that risk.”