MNI INTERVIEW: Fed Well Placed For Sept Rate Cut-Weinberg

MNI (WASHINGTON) - Federal Reserve officials are likely to start interest cutting rates in September as long as the next few weeks don’t bring any major inflation surprises, former Richmond Fed research director John Weinberg told MNI.

FOMC policy is well positioned because the economy is strong enough to give it the luxury of time while inflation appears to be slowing toward the central bank’s 2% target, he said in an interview.

“The underlying real side of the economy is strong enough they can wait for the greater surety that they’re looking for about inflation. I think that’s kind of what Chairman Powell said,” said Weinberg in an interview Thursday. “The employment side of the picture has objectively cooled but not in any way that suggests a more dramatic decline.”

He added Friday in follow up comments that the weaker-than-expected payrolls report and higher jobless rate of 4.3% did not alter his view: “A step up in the unemployment rate because of rising labor force participation doesn’t ring alarm bells for me.”

Fears that the Fed is falling behind the curve by holding interest rates too high for too long are overstated, he said.

NO VOLCKER SHOCK

“I’ve read some commentary suggesting that there’s a significant risk of a recession simply from the Fed holding the rate where it is too long. I’m not saying it can’t happen but I’m not sure it ever has. That’s not consistent with the way I understand recessions happen with post-war data – they happen because of a shock,” he said.

“Holding the funds rate at a moderately high level, especially with a flat or declining yield curve, doesn’t seem like the kind of monetary shock that would stress the economy the way a Volcker shock would.”

That’s not to say the economy hasn’t cooled, Weinberg added. It just hasn’t done so to any degree that is worrisome.

“Business fixed investment still looks pretty robust though and that’s a forward looking indicator, businesses invest when they’re confident demand is going to be there in the medium term. It’s an optimistic data point.”

Weinberg said one key factor that should affect the decision of when to begin interest rate cuts is that the move itself will have an impact on medium-term consumer and business inflation expectations, which themselves help drive price-setting behavior.

GRADUALISM

“Whatever people think trend inflation is, once the Fed cuts rates, there's going to be this tendency to say, ok, whatever inflation is doing now, the Fed is happy with that, because they're cutting rates.”

That could end up being a trend inflation rate a little over 2% or maybe a bit higher, above 2.5%, which Weinberg says would be more problematic.

When the Fed does begin lowering rates, it will likely take a gradual approach because of uncertainty about whether and how much the neutral rate has risen.

“Outside of an environment of highly unusual shocks, I think there’s a tendency towards gradualism,” Weinberg said.

“There's going to be some weight put on the possibility that the neutral rate is higher, which might, number one, feed the tendency towards gradualism, and number two, cause them to stop at a higher point than they then would have thought back in 2019.”