MNI INTERVIEW: Fed Should Halt Cuts Given Strong Economy-Levin
MNI (WASHINGTON) - The Federal Reserve will cut interest rates next week but should strongly consider pausing so long as the economy stays strong and employment conditions remain stable, a former Fed Board of Governors economist Andrew Levin told MNI.
“The economy is humming a lot and therefore the extent to which the Fed thought that it might need to cut rates a lot in order to keep the economy growing at a stable pace, that case should be revisited,” Levin said in an interview.
“I don’t see the urgency in the Fed making any further rate cuts right now. They should probably be waiting, watch the data some more and see.”
He was speaking after two reports showed GDP keeping on a strong path, rising a robust 2.8% in the third quarter, while ADP reported the economy generated 233,000 jobs last month, far more than expected.
Levin thinks the Fed will still cut at its upcoming meeting, especially after a weaker-than-expected payrolls report that was complicated by weather and strike effects. (See MNI POLICY: Bumpy US Data Won't Take Fed Off Course)
“This reading on nonfarm payrolls definitely eliminates any residual uncertainty about next week’s rate cut. But it’s an extraordinary divergence from the household survey, the latest JOLTS, and the latest ADP payroll reading,” he said.
“Chair Powell will presumably downplay the payroll number and emphasize that the job market remains strong. The question is whether Powell will try to create any wiggle room about making another percentage point of cuts over the next six to eight months.”
HARD TO REVERSE
The problem for policymakers, said Levin, is that it might prove hard to turn around and start hiking even if it turns out that inflation proves sticky above the central bank’s 2% target, which he still sees as a possibility.
“Every cut they make is going to be difficult to reverse. So the further down they go, if it turns out that they really needed rates at around five and they go down to four, then it’s going to be difficult to make that percentage point rate hike later,” he said. “So it’s better just to pause.”
Levin thinks it’s too soon to declare victory in the battle to control price pressures by loosening policy further given the possibility that the economy’s strong underlying momentum will prevent inflation from getting consistently all the way back to 2%.
“The inflation rate for consumer services excluding energy is still about a percentage point higher than its level prior to the pandemic. And the latest reading suggests that it may be heading upwards, not down,” he said.
“Fed officials should start using scenario analysis to help explain their policy strategy. For example, what are the Fed’s contingency plans if inflation levels off at 3% or moves upwards over coming months?”