MNI INTERVIEW: Fed Set To Start Easing By Year End-Haslag

Federal Reserve officials will likely find room to begin cutting interest rates before the end of the year as inflation resumes its downward trend after plateauing in recent months, former Dallas Fed economist Joseph Haslag told MNI.

“I think there’ll be a case by the end of the year” to start cutting interest rates, Haslag said.

The Fed this week held rates steady for a sixth meeting this week and flagged a lack of progress on inflation this year, as Chair Powell warned it could take a bit longer for policymakers to gain enough confidence in disinflation to reduce borrowing costs.

Powell sounded optimistic that the disinflation trend could soon resume, and Haslag agrees, adding that sharp downturns in growth or employment are not required to tame price pressures.

“I think they were pauses, it’s a bumpy ride down. I still think at the end of the year we’ll be closer to 2% than to 3% on PCE,” said Haslag, who spent over a decade at the Dallas Fed and is now a professor at the University of Missouri. The PCE rose 2.7% in the year to March, up from 2.5% in February, while core prices were up 2.8%. (See MNI INTERVIEW: Fed Rate Cuts Timeline Pushed Back-Reinhart)

“There’s some sluggishness in the way services prices are measured and oil prices shot up – if a ceasefire were to take hold oil prices could probably hit USD75 per barrel pretty quickly,” he said.

INSURANCE HOLD

He said that, by keeping rates higher for even longer, the central bank is essentially buying insurance against the risk that inflation will resurge or stabilize significantly above the Fed’s 2% goal.

Haslag sees little sign that economic momentum is slowing despite a weaker than expected first quarter GDP reading of 1.6%.

“My read of the GDP report was that something weird is going on in the initial report and it’s going to be revised upward, or there was a massive fallback in labor productivity,” he said. “Things seem to be going gangbusters.”

He also agrees with Chair Powell that monetary conditions are working to slow demand. “I think the stance is still restrictive for the time being – real rates are what matter,” he said.

The Fed’s long-run credibility has been a major asset in its fight against inflation, Haslag said.

“It’s kind of amazing how quickly it came down. Once we got over the transitory fiasco and got the point where they started raising rates, I think (markets) took them seriously,” he said.