MNI INTERVIEW: Fed To Stay On Hold After Rates Peak -Blinder

The Federal Reserve is unlikely to cut interest rates shortly after it stops raising them as many in financial markets still seem to think, ex-Fed Vice Chair Alan Blinder told MNI on the sidelines of this year’s Jackson Hole conference.

The Fed may also need to push interest rates somewhat higher than the central bank’s median projection of 3.8%, Blinder said in an interview with MNI’s FedSpeak podcast.

“I never believed that and I think Powell never believed that, and part of his exclamation point was to basically shout at the markets, stop believing that because it’s not going to be over that fast,” said Blinder, also a former member of the White House Council of Economic Advisers and a Princeton University professor.

That’s partly because U.S. inflation pressures are “nearly unprecedented,” as inflation has never been this high or broad in the post-war era, except during the Great Inflation of the late 1970s and early 1980s.

U.S. PCE inflation registered a 6.3% rise in the year to July while core inflation rose 4.6%. Both readings were softer than a June peak but still too elevated for the FOMC’s comfort.

“The core inflation rate is still way too high. It’s more than double the Fed’s 2% target,” Blinder said. “What you worry about is whether it’s getting into wages and via that you have secondary effects where it gets into everything. And the potential lasting effects, which don’t seem to be there yet, on inflationary expectations.”

Fed Chair Powell’s remarks, which knocked stock prices sharply lower as markets interpreted them hawkishly, included a warning that history suggests premature loosening of policy would be misguided. But many investors still think the Fed chief was just jawboning markets in the short term.

“He’s feeling the frustration that all Fed chairs feel at some point: What does it take to drum this into the heads of traders?,” said Blinder

As for the Fed’s interest rate forecast of a peak slightly below 4%, Blinder said: “If anything you probably want to nudge it higher, I don’t mean 5.8%, but probably a little bit higher.” (See: MNI INTERVIEW: Fed Sept SEP Must Reflect Rate Hike Pain–Dudley)

TOO MUCH BLAME ON FISCAL

Blinder said a large fiscal U.S. response to the Covid crisis gets excessive blame for causing the inflation problem the country is now experiencing.

“The few people who were ‘right’ about inflation were right for the wrong reasons. Overstimulus of the economy from fiscal and monetary policy together played some role, but from what we know about the sensitivity of inflation to GDP gaps, the unemployment rate, it wouldn’t be a lot,” he said.

“So they got the direction right but exaggerated the magnitude, but they’re getting tremendous credit for a food shock and an energy shock both of which emanated at least in part and maybe in large part from the Russian invasion of Ukraine.”

Blinder said another reason inflation pressures have not been transitory as the Fed first predicted is because supply chain issues have been far more protracted than many could foresee.

“The other part that made Team Transitory miss -- and by the way I was a member of Team Transitory and I’ve done many mea culpas -- was the slowness of market capitalism to fix these supply chain problems,” he said. “I’ve often characterized this as a way overestimate of the efficiency of global capitalism.”