MNI INTERVIEW: Fed Only Likely To Cut Once This Year- Giannoni
Ex-Dallas Fed research director says monetary policy is not as restrictive as officials think.
The Federal Reserve will only cut interest rates once this year, in either September or December, given stubborn inflation pressures, former Dallas Fed research director Marc Giannoni told MNI, noting that the current policy stance was only somewhat restrictive.
"They might be looking at the earliest opportunity that they can cut, and September is very much in play, but if the data does not allow that -- in particular if PCE inflation is a little firmer -- then they could easily push that out to December," he said in an interview. "It would be one cut for the year, so it would be either September or December."
A third month of hotter-than-expected inflation, continued labor market, tightness and a resilient economy is not going to allow the Fed to cut by the 75 basis points starting in June that the FOMC had indicated in its March economic projections, Giannoni said. But he stressed that the central bank still leans in the direction of easing policy this year.
"They want to cut and they've signaled that over and over again." (See MNI INTERVIEW: One Fed Cut Most Likely 2024 Outcome - Keister)
Giannoni expects first quarter growth of about 2.5%, with risks tilted to the upside, before some gradual moderation in the second half of the year to about trend. Inflation, he said, will only gradually ease this year.
"For core PCE inflation, I expect in the near term a pretty solid print," said Giannoni, now chief US economist at Barclays, expecting a 0.27% month-on-month increase in March. "We still have a pretty solid print in April and then by the end of this year we have core PCE inflation ending at 2.8%."
Year-end PCE core at that level would be 20 basis points higher than the median expectation in the Fed’s March forecasts.
HIGH SHORT-TERM NEUTRAL
Fed officials have repeated that monetary policy is restrictive, but Giannoni said it may not be as restrictive as thought. "This is one reason that it will be difficult to have more than one rate cut for the year," he said.
Fed officials in March projections raised estimates for the longer-run neutral interest rate to 2.6% from 2.5%. Not only are those Fed estimates likely to continue to move higher over time, Giannoni said, but also the short-run neutral interest rate is higher than thought.
For the short-term, currently "we're talking about an equilibrium interest rate that's probably way higher than what we have for the longer run," he said, adding that he likes to look at the New York Fed's DSGE model. "That basically tells you that, according to this model, today's equilibrium funds rate is closer to 4.5% to 4.75%."
The Federal Reserve has held the fed funds rate in a range of 5.25% to 5.5% since July. Rates "are high by historical standards, but they are not much higher than neutral and in the short-run and it does not strike me as particularly restrictive," said Giannoni. (See MNI INTERVIEW: Fed Not Restrictive, Might Need More Hikes - Levin)
"Bottom line, I think there is indirect evidence that the current short-term natural rate of interest is elevated and that over time it would gradually moderate from here, but it would go to a level that's slightly higher than what we had before, probably around 3% to 3.25% and no longer the 2.5% percent we had before."