MNI INTERVIEW: Fed To Cut Once Or Twice This Year-Friedman
MNI (WASHINGTON) - The Federal Reserve will cut interest rates twice more at most this year starting in June, and could well halt its easing cycle after that as inflation remains fairly sticky and economic conditions robust, former New York Fed economist Steven Friedman told MNI.
"After the experience of last year, I think if we get through the first quarter of this year with benign inflation readings that would open the door to a rate cut at the June meeting,” he said in an interview.
However, the numbers might not cooperate over the next couple of months, said Friedman, now senior macroeconomist at MacKay Shields. He worries that trimmed mean measures are sending less than encouraging signals, as is the prices paid index on the ISM services survey. Friedman also fears the wildfires around Los Angeles will produce an inflationary impulse.
“The fires in California will lead to an increase in inflation near term in categories such as new and used cars, rents and insurance. It's just too important of an economic region in the U.S. not to have some impact in the aggregate data. And then of course the policies of the incoming administration could prove inflationary over time,” he said, citing the prospect of higher tariffs.
Moreover, the economy is growing strongly enough to indicate it does not need additional support from monetary policy, said Friedman.
“My base case is two rate cuts this year, with the first one in June, then again possibly in the fall or December. That second rate cut will be complicated by greater clarity on the fiscal outlook and whether that will be expansionary,” he said. (See MNI: Fed Inflation Fears Back On The Rise, Even Before Tariffs)
“The data has been encouraging, but I think after the experience of last year, where we've had some stubbornness and inflation, it doesn't suggest to me that the Fed should urgently be thinking about cutting rates anytime soon, especially with the labor market stabilizing at a still very healthy level of jobs growth."
HEALTHY EMPLOYMENT
There is even a chance that the job market might actually keep strengthening from here, said Friedman, which would have additional hawkish implications for Fed policy.
“If anything, there's some possibility of the unemployment rate even ticking a bit lower from here, yeah, because we could have some labor supply constraints while labor demand remains healthy, so that could put some downward pressure on the unemployment rate,” he said.
“It does appear that the vacancy-to- unemployment ratio has at least stabilized, if not moved a little bit higher. If that continues, it could suggest a renewed tightening of the labor market that could feed through to wages and inflation.”
ELEVATED NEUTRAL
Growing suspicion that the neutral rate of interest has risen post-pandemic, perhaps significantly, reinforces the prospect that the fed funds rate might end this cycle not too much further from where it currently stands, perhaps in a range of 3.75-4%, Friedman said.
"It's hard not to look at the strength in the economy last year, when we were at peak fed funds, and not come away with the conclusion that perhaps the neutral rate is elevated,” he said.
“Some of that could be structural in terms of higher trend growth. Some of it could be more cyclical as a result of fiscal policy. But I think that's a reasonable conclusion, and the FOMC has been wrestling with that. We’ve seen them revise up their neutral rate estimates, I think that’s going to continue this year.”