MNI INTERVIEW: Fed Running Out Of Reasons To Hike- Williamson

Jerome Powell's Federal Reserve is running short of reasons to lean towards tighter policy with evidence inflation is moving back to target, former St. Louis Fed vice president of research Stephen Williamson told MNI.

“They have to think of reasons why they should bring rates down. And it’s a little puzzling why they keep wanting to go up,” Williamson said. “Some of it’s inconsistent too, you’ll say oh it takes a long time for policy to work. But here they are at 3% (inflation),” Williamson said.

The Fed raised its key rate a quarter point Wednesday to 5.25-5.5% and Powell later told reporters he could pause or hike again if the data didn't show enough progress cooling inflation. (See: MNI FED WATCH: Powell Withholds Guidance, Keeps September Live) Headline inflation was the slowest since March 2021 at 3.0% but core inflation was more than double the Fed’s 2% target at 4.8%.

Powell's reference to the dot plot showing no rate cut until next year is also curious, Williamson said, given the Fed's emphasis on making decisions meeting-by-meeting based on incoming economic reports. The Fed chair, conscious the central bank was caught off guard during the post-pandemic inflation surge, is essentially giving soft forward guidance, he noted.

PEOPLE GETTING OVER-WROUGHT

“Powell said I’m not comfortable talking about forward guidance, but he did,” Williamson said. “He said we’re not going to cut rates until next year ... How do you know that now?”

Still, Williamson was skeptical about investors who for much of this year have bet the Fed will cut rates in 2023 and pointed to inverted yield curves as a recession harbinger.

“A lot of people are getting over-wrought about predicting a recession, but it hasn’t happened and there’s nothing in the data to tell you it’s coming,” Williamson said. “If you see a recession coming then they are going to behave differently, they’ll start cutting then for sure, but there’s no signs of that coming.”