MNI INTERVIEW: Fed ‘Skip’ Heralds Premature Pause-Ex-Staffer

The Federal Reserve’s decision to forego another interest rate hike this week could make officials more reluctant to raise borrowing costs at future meetings, leading to a premature pause that will fail to bring inflation sustainably back to the central bank's 2% target, ex-New York Fed executive Rick Roberts told MNI Thursday.

That’s because not raising rates in June despite recent hot economic data ranging from inflation to employment raises the bar for future increases, he said, adding that Fed Chair Powell’s press conference did little to clarify the outlook.

“I don’t think they will hike in July,” he said. “With one more round of data before the next meeting, it’s hard to imagine what could be so different that you’ll come off the pause.”

INERTIA

The longer policymakers wait to boost rates again, the more difficult it will be to resume monetary tightening.

“I’m not sure they’re going to hike again. I just believe the data, if that’s their story, is not going to meet the criteria for additional rate hikes. The longer they sit on a pause the easier it is to stay there,” Roberts said. “I kind of hear Powell saying, barring a material change of the story that causes us to pause, we’re probably going to pause." (See: MNI INTERVIEW: Fed Pause Could Make Inflation More Entrenched)

The Fed kept interest rates on hold in a range of 5%-5.25% at Wednesday’s meeting but also raised FOMC projections for the median peak rate expectation to show at least two more 25 basis point rate increases. Markets were confused by the mixed messaging and somewhat skeptical, a view shared by Roberts, who is now a professor at Monmouth University.

“The communication strategy and outcomes really leave a lot to be desired. They really backed themselves into a corner,” he said.

POLICY ERROR

Despite his view that the Fed is done hiking rates, Roberts thinks this is a policy mistake that will keep inflation from returning all the way back to the Fed’s 2% goal, which would be a hit to the central bank's credibility.

He said that officials already seem to be considering a move toward an inflation band rather than a singular target, which MNI reported exclusively last week.

“What they should do? Fed funds should be higher, maybe in the 5.5% to 6% range. We’ve got a long ways if we’re hellbent on getting all the way back to 2%. But I just don’t think they’re hellbent on getting all the way back to 2%,” Roberts said.

“With this talk of inflation ranges – I think there’s a real risk that this is the end of the tightening cycle,” he said.

That means officials might end up settling for a higher inflation rate than is desirable for the economy to operate smoothly.

“This pausing, against the backdrop that they were behind the curve to raise and inflation spun out of control, they really don’t have that luxury,” he said. “Sure, inflation expectations look still anchored, but what does it take to un-anchor those? (Fed officials) are getting close to giving up.”