MNI INTERVIEW: Fed Standing Pat, Awaiting Clarity - English
MNI (WASHINGTON) - The Federal Reserve this week will likely show risks to its inflation and employment mandates largely in balance and another one or two interest rate cuts later this year, former director of the Fed Board's division of monetary affairs William English told MNI.
"Two [25 basis point cuts] is still reasonable. It might only be one, because inflation has been a little bit on the high side," said English, emphasizing uncertainty and noting the standard error around the end of year federal funds rate in the FOMC's quarterly projections is a percentage point in either direction. "Their most likely outcome would be identical to what they saw in December. So, I put down two cuts, but with no conviction at all."
The hard economic data in hand is showing the "situation just hasn't changed very much since December," he said, noting competing forces on the economy.
"The information we have so far points to somewhat higher inflation, both because the data have been a little high and the concern about tariffs," English said. "The outlook for the real economy is also a little weaker because of the uncertainty weighing on spending, and those things kind of cancel out for the funds rate. I'm not sure there's really a direction that I move in either way. I can see arguments either way." (See: MNI: Fed SEP To Show 2 Or Fewer Cuts, Two-Sided Economy Risks)
NET EFFECTS
Officials will mostly be sitting on the fence for now because of sticky inflation numbers but also because it remains to be seen which way the net effect of Donald Trump's policies lean. (See: MNI INTERVIEW: Fed Likely Pushing Back 2025 Cuts - Lockhart )
English noted in 2018 when Trump was threatening tariffs that Fed staff estimates concluded there was no real benefit to responding to the tariff policies, so long as inflation expectations remained well-anchored near the inflation target, and because monetary policy works with a lag.
"If we ended up in that world where the economy remains pretty solid, but inflation is higher by a percentage point or so because of tariffs, the Fed would be very sensitive to what's going on with inflation expectations," he said. "If they thought that expectations were going to come unanchored, and you were going to end up getting just higher inflation built into wage and price setting in a sustained way, they'd have to respond to that."
English said recent surveys of inflation expectations show "anchoring is a bit less clear," but it is "not obvious that inflation expectations are coming unanchored to the upside." (See: MNI INTERVIEW: Inflation Expectations Worrisome For Fed-UMich)
"Stagflation is a risk," he said. "But a high level of uncertainty about policy could also cause spending to pullback and then you have a weaker economy with lower inflation. But those effects may take some time to build."
UNCERTAINTY
While efforts by the Department of Government Efficiency to slash government spending are likely to cloud incoming jobs reports over the coming months, there is no clarity on whether there will be a meaningful fiscal tightening that impacts the Fed, he said.
"I don't think anything has been big enough to really matter for the U.S. economy," he said. "The uncertainty effects are much bigger than the DOGE effects."
"If you're the Fed, you're just so unsure about how this is actually going to shake out, what the courts are going to do and what the administration is going to do with what the courts say about all of this," English said.
"A much bigger signal would be if we saw a pretty weak consumer confidence, if other measures of business and consumer confidence really take a nose dive, and the spending indicators start to look bad. That would be a much bigger deal."