MNI INTERVIEW: Fed Rates Likely On Hold Through 2025-Croushore
MNI (WASHINGTON) - The Federal Reserve might not cut interest rates at all this year because inflation looks poised to tick up again, Philadelphia Fed visiting scholar Dean Croushore told MNI.
“I see inflation drifting up through the next six months to a year,” he said in an email exchange. “It is most likely that rates stay still for the year. The overall strength of the economy will keep inflation pressure up.”
Fed Chair Jerome Powell said last week the central bank is in no hurry to cut interest rates and needs to see more progress on inflation, but he added that “we seem to be set up for further progress.”
Croushore doubts such optimism is warranted given the robust growth backdrop and high fiscal deficits.
“His use of the term ‘set up’ to me means ‘it may not happen, but could’,” he said. “I think the Fed over the past two years is guilty of wishful thinking about inflation, believing it will decline more than turned out to be the case.”
Given that record, he added, “they shouldn’t cut rates more, unless inflation really comes down.” (See MNI INTERVIEW: Fed Won't Consider Cuts 'Til At Least May-Groen)
The Fed’s preferred PCE inflation measure rose 2.6% in the year to December, while core PCE climbed 2.8%. The 0.2% monthly increase was seen as benign but the annual rate is still well above the 2% target.
FISCAL DOMINANCE RISK
Policy proposals from the Trump administration could further fuel inflation pressures, added Croushore, who spent 14 years at the Philly Fed as a staff economist and is now a professor at the University of Richmond.
“Tax cuts and bigger budget deficits are likely and may contribute to higher inflation,” he said. “The question is whether bad government policies like tariffs will derail the economy.”
Croushore also worries about the threat to Fed independence under a vocal Trump administration.
“Fiscal dominance is a major concern. If deficits get bigger as a share of GDP, the Fed will need to tighten a lot in coming years. Will they? They must, if they want to survive. It’s a difficult time for policymakers,” he said.
The next move on official interest rates, which the central bank held steady at 4.25-4.5% at its latest meeting, could just as well be down as up, he said.
“If inflation rises too much, the Fed could reverse course and raise rates. But if inflation stabilizes or drifts down a bit, they’ll cut some and will look for any signs that help them do so,” said Croushore.