MNI INTERVIEW: Fed Should Cut Rates 150BPS This Year-Benigno

MNI (WASHINGTON) - The Federal Reserve should cut rates aggressively this year to quickly get borrowing costs to neutral levels and avoid further deterioration in the labor market, former New York Fed visiting researcher and Jackson Hole paper author Pierpaolo Benigno told MNI. 

“I would go for a very bold cut, which means 50 basis points now and 150 basis points for this year, and complete the adjustment by the middle of next year,” Benigno said. Rates should be at 3.5% by mid-2025 and 3% by the end of 2025, he said.

He thinks the labor market is still fairly robust despite recent softening but that likely won’t remain the case if monetary policy remains as tight as it has been. The Fed risks falling behind the curve on the way down just as it did on the way up, he said. 

“Policy is too tight now. The real rate today is 3%, which is the same real rate you had when you were tightening policy one-and-a-half years ago, but now you are in a condition of labor market softening. You want to normalize monetary policy as inflation is falling,” said Benigno, a professor at the University of Bern. 

He sees little reason for the recent progress on inflation to stall or reverse, barring any new shocks, which he said should not hobble the course of policy since they cannot be foreseen. (See MNI POLICY: Fed Increasingly Convinced It Defeated Inflation)

KINK IN THE BEVERIDGE CURVE

Instead, Benigno believes the FOMC is right to have shifted its focus away from the inflation side of the mandate as price pressures abate and turn its attention to the maximum employment part of the central bank's mission. 

His research, presented by his colleague Gauti Eggertson at this year’s Jackson Hole conference, found that the economy had thus far experienced a soft landing because much of the decrease in labor market tightness was coming from a decline in the number of vacancies rather than a spike in the jobless rate. 

However, the work also identified a 4.4% jobless rate,  just two tenths higher than the August jobless rate, as the point at which that relationship might begin to break down. Benigno said the Fed should avoid flirting too closely with that kink in the Beveridge curve, which denotes the relationship between vacancies and unemployment.  

“If you are above, then you start to see the adjustment happening more in unemployment rather than vacancies,” Benigno said. 

That might explain why Fed Chair Jerome Powell was so forceful in his Jackson Hole speech, warning the Fed does not “seek or welcome” any additional cooling in the job market, he said.  

“The labor market is most well positioned. If you normalize your policy stance, then you’re going to be able to react downward or upward,” Benigno said.