MNI INTERVIEW: Fed Must Hike Rates To 6%, Maybe 7%-Ex-Staffer

Federal Reserve officials must hike interest rates to 6% and perhaps even to 7% to tame inflation even if they pause in June to assess the speed of recent tightening, ex-Philadelphia Fed economist Dean Cruoshore told MNI.

Cruoshore disagreed with Jerome Powell’s description of monetary policy as “tight” in his May press conference, especially in light of inflation that has been subsiding but remains far above the 2% target. The Fed chair hinted at a pause on Friday when he said turmoil in U.S. regional banks likely meant interest rates wouldn't rise as much.

“Policy is not really tight and we see that in the stubbornness of core inflation. I’m thinking they need to get the fed funds rate to at least 6% before they are done, and possibly as high as 7%,” said Cruoshore. He spent 14 years at the Philadelphia Fed and his research was cited in a recent speech by Fed Governor and Vice Chair nominee Philip Jefferson.

“Core inflation is likely to remain high and that they will need to tighten more in subsequent meetings," Cruoshore said. Inflation has been coming down since a summer 2022 peak but core CPI remained stubbornly hot at 5.5% as of April.

Many Fed officials have hinted that a pause in rate hikes does not necessarily mean the end of the tightening cycle, with St. Louis Fed President James Bullard saying he sees at least another 50 basis points of increases.

JUNE PAUSE NOT A PEAK

Cruoshore said given the speed of monetary tightening beginning in March of last year, it makes sense for the central bank to pause and assess the cumulative effect.

“A pause in June would be quite reasonable. The Fed has actually tightened more than I thought they would from March 2022 to today,” he said.

The Fed has raised rates 500 basis points to a range of 5%-5.25% since March of last year. Top policymakers including Powell have voiced concern about repeating what they see as the mistakes of the 1960s and 70s – including a start-stop approach to monetary tightening.

The Fed’s June meeting will include a new Summary of Economic Projections, which might allow the central bank to deliver a “hawkish pause” that maintains a tightening bias and thus leaves the door open to additional increases.

“Because of the aftermath of COVID messing up all of our macroeconomic data, the degree of uncertainty around all forecasts is huge,” Cruoshore added.