MNI INTERVIEW: Fed Patience To Be Limited By Election-Reinhart
Risk assessment suggests Fed would wait to begin easing in September, but that is not a viable option given proximity to the presidential elections, a former top Fed staffer says.
The Federal Reserve's wait-and-see mode on monetary easing will be limited by political constraints and the timing of the November elections, meaning the first interest rate cut is likely in June and not later, former Fed Board division of monetary affairs chief Vincent Reinhart told MNI.
The Fed can be slow, gradual and methodical this year, he said. But "the job of the Fed in 2024 is to begin the process of realigning the nominal funds rate lower so policy doesn't get too restrictive in real terms."
The economic expansion continues to have momentum and the last mile in reducing inflation is hard, Reinhart said. "The macro data could warrant waiting longer," he said in an interview, raising September as an alternative to begin the easing cycle. But "they'll pick the option to go in June instead and it's about the election. It's not that the Fed is political and wants to influence the election. The Fed wishes the election weren't there." (See: MNI INTERVIEW: Fed Will Bide Its Time On Rate Cuts - Lockhart)
AUTOPILOT
The Fed would be "better off starting in June, put it on autopilot, and convince market participants they are going to ease every other meeting on a Summary of Economic Projections cycle," he said. "Get the headlines when the election campaign is not in full force and then have it on autopilot the rest of the year."
A relatively calm backdrop with a little more distance between the first Fed rate cut and the November elections means that markets better understand the central bank and the wider public doesn't see political motivation driving the Fed, Reinhart said.
"After Labor Day everything is going to be interpreted from the lens of the presidential election," he said. "Can you imagine anything that would be more confusing to the American public about the intent of the Federal Reserve if they started easing in September? It's basically drawing the bull's eye on the [Fed] board building if you start the easing cycle in September."
June is their least-worst option to slip action into the political current, especially relative to the fall, said Reinhart, chief economist at Dreyfus-Mellon.
QT ON SLOW TRAIN
As for the Fed's balance sheet, a USD1.4 trillion runoff in assets so far has been matched by a decline in overnight reverse repos, providing Fed officials the assurance that reserves remain well north of ample. Fed officials are much more focused on keeping the target rate in its declared range, he said.
"They think they've got time and they are going to use it," said Reinhart about timing of when to slow the decline in the balance sheet. "They can settle on a plan in May to start in June."