MNI INTERVIEW: Fed Nearly Done Easing Barring Slump-Benigno
MNI (WASHINGTON) - Federal Reserve officials will likely cut interest rates once or twice this year if inflation eases further or growth begins to flag, but the easing cycle is nearly finished barring a deeper downturn, former New York Fed economist Gianluca Benigno told MNI.
“They are very cautious in terms of moving forward because they see sticky inflation, they don’t see the progress they expected especially on the service side, and now there’s a risk that goods inflation might contribute rather than subtract from inflation,” he said in an interview.
Though he is optimistic about the inflation hit from tariffs being a one-time price shock rather than a continuous fuel of price pressures, Benigno said the effects are hard to discern given the uncertainty surrounding the extent of the policies and the prospect of recurring retaliation. A softer growth outlook, for instance, might reduce the ability of firms to pass cost rises along to consumers.
“It might be a good situation for inflation to the extent that firms maybe are more concerned about passing through (higher prices) in a weakening economy,” said Benigno.
HIGHER NEUTRAL
Beningo said there has a been a hawkish shift in the composition of FOMC voters this year that makes a prolonged pause more likely than otherwise.
And even if the central bank manages to cut rates once or twice more this year, it is likely already close to the end of the easing cycle given the increasing recognition of a higher neutral rate among Fed members. That would leave the fed funds rate just around the 4% mark.
“I see them cutting twice and unless there is a downturn in the economy I see them holding there, and these would be just adjustment cuts,” he said. (See: MNI INTERVIEW: Fed To Cut Just Once Due To Tariffs-Carpenter)
The Fed is widely expected to keep rates on hold at 4.25-4.5% next week, and Benigno expects the accompanying Summary of Economic Projections will show a median of either one or two cuts from FOMC members, versus two cuts in the December SEP.
SENTIMENT DRAG
Benigno does not think a recession is in the cards, in part because there is no sign that the loose fiscal policy that has supported growth will be reined in. Still, a recent downtick in sentiment reading bears watching to see if it filters through to hard data. (See: MNI INTERVIEW: Fed To Closely Gauge Inflation Views - Schoenle )
“I don't see the big correction from the fiscal side that leads to a more concerning outcome in terms of growth. I see maybe the risk of sentiment spreading into changing behavior,” said Benigno, a professor at the University of Lausanne in Switzerland.
He said uncertainty over U.S. tariff policy was helping to drag sentiment, noting a jump in expectations of joblessness in the latest New York Fed survey.
“All this back and forth, and the fact also that this time around tariffs are a much more aggressive policy action relative to the 1.0 version Trump. This is creating uncertainty and contributing to these negative shifts in consumer surveys,” he said.
“There is some fear over to what extent all this will transfer into actual behavior, which is what eventually will lead maybe to a correction.”