MNI INTERVIEW: Fed's Powell Tries To Corral Hawks By June-Sahm

Federal Reserve Chair Jerome Powell’s remarks at this week's policy meeting suggest he wants to cut interest rates in June, though FOMC projections show he will have to work to get some of his more hawkish colleagues on board, former Fed economist Claudia Sahm told MNI.

“He’s June, his outlook for the economy would make June the most appropriate timing for the first cut,” Sahm, a former section chief at the Fed board, said in an interview.

The problem for Powell is "there are more than two voting members that don't want to," she said, indicating the often hawkish Governor Miki Bowman is likely among these.

That means he could have a hard time getting everyone on board for a June cut and perhaps have to wait until July, particularly because it would be striking to see dissents at such a momentous decision as the first cut of the cycle in an FOMC where dissents have been much fewer than seen by his predecessors.

TEAMS TWO AND THREE

“I don’t know if he can get it done by June,” she said. (See MNI INTERVIEW: Fed Will Bide Its Time On Rate Cuts-Lockhart)

The chair has been adept at driving consensus including what Sahm said was likely a subtle intervention on his part to prevent the median dot in the Fed’s Dot Plot from shifting to two cuts from three.

“There had to be more than two FOMC members of participants on team three (cuts) than wanted to go to team two,” she said.

Sahm, speaking a day after the Fed held rates steady and signaled three cuts for this year in its Summary of Economic Projections, is still optimistic about the prospect of a soft landing. She has become prominent in recent years for what economists call the "Sahm rule" laying out conditions for a potential recession.

CONSUMER WEAKNESS

Recent weakness in retail sales gives reason for concern about the state of the consumer, which is often the first place where economists can observe signs of an economic downturn, she said.

The longer the Fed waits to cut, Sahm said, the more it risks being behind the curve on the way down. That criticism also emerged as the Fed hiked after a surge in inflation caught policymakers off guard.

“We’ve had two bad months of retail sales. The job market is usually not the first thing to go. It’s the consumers,” she said.

Starting to cut rates sooner would allow Fed officials to move more slowly, said Sahm, also a former staffer at the White House Council of Economic Advisers. The Fed hiked rates by more than 5 percentage points between March 2022 and July 2023, from effectively zero to a 23-year high of 5.25-5.5%.

TAKING IT SLOW

“They should get going in May," she said. "Part of the benefit of starting sooner is you can go gradually. Every time they wait – if things start to go south, then they have to go bigger, if things are starting to fall apart you don’t have the luxury to go 25 basis points.” (See MNI INTERVIEW: Fed Should Get Going On Cuts-Bullard)

Fed officials are certainly applying that rationale to their effort to reduce the balance sheet. Powell signaled in his press conference that a tapering of QT will come “fairly soon” but added that this could be a way to prolong asset runoffs.

The Fed seems to be favoring a gradual approach to rate cuts, Sahm said, as the economic backdrop is still fairly robust and inflation is coming down after a surge.

“I think they would like to do 25 basis points, wait a meeting, 25 basis points, wait a meeting, then maybe do some meetings in a row. As long as things remain smooth sailing 25 basis points is absolutely the increment I would expect," Sahm said.