MNI INTERVIEW: Fed Set For June Cut, Risks Later Move-Sheets

The Federal Reserve can take its time to assess incoming economic data but the baseline is the central bank starts its easing cycle in June, former Fed board economist Nathan Sheets told MNI, adding that the risks are are tilting toward a later cut.

Recent inflation reports have been challenging and it remains to be seen whether they reflect noise or signal, but Fed officials have to time wait and see, said Sheets, who thinks three rate cuts are likely this year.

"January and February data threw a wrench in the picture," he said, but "the economy is gradually slowing."

The Fed will most likely deliver its first rate reduction in June and, depending on the strength of the economy, likely a couple more times later in the year, but the risks have shifted in recent months, Sheets said. "Three months ago, I would have said June with the probability of it coming earlier, and now I think the risks to June are skewed toward it coming later."

The March "dot plot" could also show a growing number of officials projecting higher interest rates by the end of this year, in addition to stronger GDP growth and elevated inflation relative to target, Sheets said. (See: MNI: March "Dot Plot" To Show Fewer Fed Cuts, Ex-Officials Say)

"I see mark to market changes to their forecasts for inflation and growth, maybe core PCE up to 2.5%-2.6%," he said. "If they want to lean a little hawkish then they move to two cuts instead of three. That's the biggest thing I'm watching and what I want to know from this meeting."

MUTED FOREIGN IMPACT

Sheets, who served as director of the Fed Board’s division of international finance from 2007 to 2011, said the international outlook is not moving the Fed either way. The international outlook "isn't strong enough to move back into the US, nor do I think weak enough either."

China will likely see growth around its target of 5% this year although it faces numerous risks, including downward price pressures. European growth is weak but is improving as the year progresses, and Latin American countries are looking "good" with several central banks already lowering interest rates. (See: MNI POLICY: Inflation Data To Ease Brazil Cenbank Wage Nerves)

"The global outlook is lackluster but generally stable over the forecast period. It is unlikely to be a big source of stimulus for the U.S. and also unlikely to be a big source of drag," he said.

The Fed, the Bank of England, and the European Central Bank are all likely to begin easing cycles in June, Sheets said, but the central banks will continue at different paces. "The Bank of England and the ECB are likely moving by 25 basis points a meeting through the end of the year, unlike the Fed."