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MNI INTERVIEW: Fed To Open Door To Sept Cut Next Week- English

MNI (WASHINGTON) - The Federal Reserve at its meeting next week is likely to open the door to a rate cut soon in September, conditional on intermeeting data, the former director of the Fed Board's division of monetary affairs William English told MNI.

The FOMC is likely to indicate that it has seen more material improvement on inflation in recent months, said English. "The communication will be mixed but on balance will certainly open the door to easing in September."

The Fed is "most likely" to cut by 25 basis points twice this year, in September and December, he said in an interview. Rates have been at a 23-year high of 5.25-5.5% since July last year and the Fed last lowered them in March 2020, when the fed funds rate reached the zero lower bound during the pandemic.

INFLATION "ELEVATED"?

Richmond Fed President Thomas Barkin last week told reporters policymakers will debate at the July policy meeting whether it is still appropriate to describe inflation as elevated in the FOMC statement. "If it's at 2.6%, is that elevated versus our target? Of course. But there's a lot of semantics you can play and there's a lot of words one can use," Barkin said.

Fed officials' assessments of inflation have become more upbeat and that would be expected to be reflected in the FOMC statement and in Chair Jay Powell's press conference, said English, a former secretary to the Federal Open Market Committee and now at Yale University. "They'll characterize the recent data as providing a little more confidence, but maybe not quite enough yet." (See MNI INTERVIEW: Fed Cuts Near, Hiring Weaker Than Appears - Wilcox)

Inflation is showing signs of moving back toward the FOMC's target of 2% on a sustained basis, and the labor market has softened recently without any significant risk of falling off a cliff. "I don't see a lot of downside risk. The data seem pretty solid, and it would be surprising if the economy suddenly slowed a lot in the next couple of months."

English downplayed the economic impact of whether the Fed begins to lower rates in July or September. "At some level, it doesn't matter that much whether you ease now or ease in six weeks in any macro model I know. That's not really a big deal in terms of the ultimate outcomes for the economy," he said.

But the Fed "will worry about setting off an excessive easing of financial conditions" and "will be careful to say both at this meeting - also in September - that they're not on any sort of preset course of easing every meeting or every other meeting or anything else, but will continue to be looking at the data,” he said.

DOWNWARD TRAJECTORY

"They'll want to get on a downward trajectory with rates and they'll be moving down rates not at a really fast pace but a steady pace for the next year or two and then see where they get," he said.

"That said, it will be a hard fight to fight in terms of communication," said English, 

The central bank will need to signal it sees inflation on a path to its 2% target without also indicating it sees a series of rate cuts as appropriate.

"They'll just want to remind everybody that the SEP is their best guess, but it is by no means a promise in terms of policy,” he said.

MNI Washington Bureau | +1 202-371-2121 | evan.ryser@marketnews.com
MNI Washington Bureau | +1 202-371-2121 | evan.ryser@marketnews.com

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