MNI INTERVIEW: Fed To Cut Once Or Twice At Most In 2024 -Pakko

The window is narrowing for the Federal Reserve to live up to its March forecast for three rate cuts by the end of this year, and the central bank is likely to deliver at most one or two reductions, former St. Louis Fed economist Michael Pakko told MNI.

While inflation is heading in the right direction, price pressures tend to be sticky and slow to dissipate, so it will take time for policymakers to gain full confidence that consumer price growth is headed back to the 2% target, Pakko said in an interview.

“I wouldn’t be surprised to see one or two cuts but probably not three this year,” he said. “I’ve expected all along given the sluggish dynamics of inflation that it’s going to be a while before it goes from 3% to 2%. It’s definitely trending in the right direction.”

NO URGENCY

March data released Friday showing another larger-than-expected gain of 303,000 new jobs “doesn’t increase the urgency of rate cuts. This gives members more time to wait and see,” said Pakko, now chief economist at the Arkansas Community Development Institute. (See MNI POLICY: Fed Won't Hesitate To Ease If Employment Falters)

“The last dot plot for the March meeting showed a couple of members saw no rate cuts this year,” he said, although he noted that the distribution was still broadly centered on two or three reductions.

The election calendar would not likely sway the timing of the Fed’s first cut, despite speculation to the contrary, he said.

“In my experience, they avoided any discussion about the implications of politics,” said Pakko, who spent 16 years at the St. Louis Fed as a research economist and officer.

GRADUALISM

Officials can afford to be gradual about cutting interest rates against a backdrop of robust economic and employment growth, he said. (See MNI INTERVIEW: US Manufacturing Rebounds, Price Hikes Concern)

“It’s likely to be a slow process and they’re not going to have the imperative to drop rates to zero again. We’re going to be settling at a more normal level” said Pakko, who thinks rates are likely to end the cycle about 200-300bp lower.

He foresees no major resurgence of inflation given money supply dynamics, and believes the Fed’s forecast for 2.6% year-end PCE is in the ballpark. “That seems reasonable, 2.5-3%,” he said.

A major wildcard is the ongoing fiscal impetus to the economy that appears to be countering one of the most aggressive rate hiking campaigns in the Fed’s history, which saw the fed funds rate jump from effectively zero to a 23-year high of 5.5% in just 16 months.

“There’s still a lot of fiscal stimulus out there, there’s even growing concern where fiscal policy dominance is going to take hold and the Fed will have no option but to accommodate a higher inflation,” Pakko said.