MNI INTERVIEW: Fed To Ease Modestly In '24 -Ex NYFed's Benigno

Federal Reserve officials will reduce interest rates several times this year – likely more than policymakers are letting on but not as many as the six cuts markets have priced in, former New York Fed economist Gianluca Benigno told MNI.

“It will probably be somewhere in between – three might not be enough cuts but maybe six is too many,” Benigno, who used to lead the New York Fed’s International Studies Department, said in an interview.

The market pivot to expectations of an imminent rate cut prompted by the dovish tone of the Fed’s December decision has made the central bank’s job more difficult, he said.

“Financial conditions have eased, which is a bit of a problem,” Benigno said. “My impression is they are trying to push back on March, but it’s a difficult call because market pricing is pretty aggressive.” (MNI INTERVIEW: Bullard Says March Is Too Early For Fed To Cut)

SOFT LANDING CUTS

The Fed will be cutting borrowing costs in order to keep pace with falling inflation, which he thinks could dip as low as 2.5% in the first half of 2024, rather than as a result of any economic downturn, he said.

“I don’t see a recessionary development given what we are currently seeing. I see a soft landing, further moderation in inflation and a consequent adjustment in real rates,” said Benigno, now a professor at the University of Lausanne.

“This is also helped by the fact that inflation expectations have come down further,” he said, pointing to an across-the-board decline in the latest New York Fed survey, which Benigno said has become more of a guidepost inside the central bank than other measures.

SURPRISED BY LACK OF R* ADJUSTMENT

Benigno said he was surprised policymakers did not pencil in a higher neutral rate of interest in their December projections, something that might have countered some of the dovishness in the rates portion of the SEP and Chair Powell’s press conference remarks.

“I was very surprised in the last policy meeting by the R* projection – that added a further dovish element,” he said. “There is some evidence that R* at least in the short run is actually higher. The economy is very resilient to interest rates because there is less exposure to interest rate movements, the fact that many have locked in mortgage rates very low for a long time makes it less sensitive to interest rates.”

One factor that makes it hard to envision the country slipping into recession is the sheer size of the fiscal impetus reflected in a budget deficit which hit USD1.7 trillion last year.

“It’s very hard to see a recession when you have such a big push to aggregate demand in terms of fiscal policy,” Benigno said.

The main risk to the outlook could be some sort of unforeseen financial crisis, Benigno said, which usually takes markets by surprise almost by definition. That’s one reason he believes the Fed will ultimately decide to renew its Bank Term Funding Program, created to address the regional banking turmoil in March 2023.

“That facility to me has been very important in addressing the financial vulnerabilities coming from higher interest rates. I don’t think they will eliminate it,” Benigno said.