MNI INTERVIEW: Fed To Temper Pace Of Cuts In 2025 - Bullard
MNI (WASHINGTON) - The Federal Reserve could pause interest rate cuts as early as December and make further reductions at a tempered pace next year on the rising risk of sticky inflation, former St. Louis Fed President James Bullard told MNI.
Growth and inflation data have come in stronger than expected since the Fed began easing policy in September. Next year, tax cuts are likely to top the agenda for President-elect Donald Trump and the Republican-controlled Congress as an issue on which most can agree. Economists generally see a large expansion of fiscal deficits as inflationary.
"There was a time when the chance of an upside surprise on inflation was getting close to zero. Now it’s off zero, and there’s some chance it will turn around and go higher. They have to guard against that probability," Bullard, dean of Purdue University's Daniels School of Business, said in an interview.
"The market pricing (for December) at 50% is about right," he said. And regardless of whether the FOMC follows through on delivering its September estimate for a cumulative 100 bp in cuts next month, fresh projections will suggest "only a handful of cuts in 2025," he said.
"Those cuts will be dependent on how inflation continues to fall in 2025. Some officials will be optimistic on that and put in four cuts, but others will be less optimistic and put in two," with the latter scenario potentially resulting in cuts in June and December, he said. "That whole process will suggest the committee will clearly be slower in 2025. Now that you’re closer to where you need to be, there's no reason to be in any hurry." (See: MNI INTERVIEW: Fed Laying Groundwork For Rate Cut Pause-Lacker)
TARIFFS THREATEN GROWTH
Blanket U.S. tariffs are likely to be a greater threat to growth than to inflation, Bullard argued. In 2019, the FOMC lowered interest rates twice to protect the economy from a global slowdown resulting from then-President Trump's trade war with China.
"If you think it’ll play out in a similar way this time, inflation is the wrong narrative for this situation," he said. Tariffs impact prices but also demand for those goods, and consumers switching to different products will dampen some of the inflation effects, he added.
Repercussions for companies in various districts are likely to set off a firestorm of lobbying for specific exemptions, and trading partners are likely to respond with tit-for-tat measures, making the ultimate impact on prices and growth difficult to predict, he said.
"Businesses faced with an uncertain situation over a two-year horizon might say, maybe I’ll postpone my investments. That’s the risk here more than an inflation risk."
FRONTLOADED MOVES
The FOMC will do its best to forecast outcomes once they know the precise contours of new policies, but is in a wait-and-see mode for now, Bullard said. (See: MNI INTERVIEW: Ex-Trump Economist-Fed Will Mistakenly Pause)
Bullard views the rise in yields in recent weeks as reflecting increased confidence in the soft landing. The un-inverting of the 2yr/10yr yield curve is good news, he said. "The eventual soft landing will have a lower policy rate and an upward sloping yield curve. Markets are more confident about growth prospects."
The incoming administration's policy changes are likely to be frontloaded over the next two years, with momentum around prioritizing growth, Bullard said. Trump might end up taking a less aggressive strategy on immigration because deportations are fairly expensive in addition to being disruptive.
"The last Trump administration was ultimately pro-growth. They wanted to do things that would enhance U.S. economic growth and they did. So despite the non-standard tactics and the way it ran, ultimately it was pro-business and economic performance."