MNI INTERVIEW: Fed Will Cut Rates More Sparingly In '24-Weber

The Federal Reserve still has scope to lower interest rates this year even with some recent signs it will take longer than expected to cool inflation, Michael Weber, an academic consultant at the Cleveland Fed and the ECB, told MNI.

While recent disappointments in core inflation data will likely push loosening by the FOMC beyond June, there is also evidence the labor market has slowed, the associate professor at University of Chicago's Booth business school said.

“Wage growth has come down quite substantially, and if it keeps coming down this would be the best sign to me as a prediction of future core inflation," he said. "Based on that I would say we are definitely still on track for an interest-rate cut this year,” Weber said. "It will certainly be pushed back and it will also maybe not be three, but maybe only one in fact.”

Part of what the Fed is managing is a bond market that's doing the work of loosening financial conditions in anticipation of a reduction in the official funds rate, Weber said. Faster rate cuts in emerging markets this year may also strengthen the U.S. dollar and make imports cheaper, Weber said, adding he also sees the ECB cutting early this summer.

The FOMC held the Fed funds rate at 5.25%-5.5% last week and Chair Powell said he's less confident in the prospects for rate cuts, a shift from the March decision where the dot plot showed officials calling for three reductions this year. (See: MNI INTERVIEW: Fed Set To Start Easing By Year End-Haslag)

LOOSER FINANCIAL CONDITIONS

“If everything else was instead constant, maybe from like six weeks ago the dot plot might not have been such a bad projection. But then what happened instead is financial markets started to rally, loosening financial conditions,” Weber said.

Officials must also continue to be careful in an economy that's flipped from inflation stuck below the target seen before the pandemic to the sticky prices seen today, he said. “A huge increase in policy rates by the Fed hasn’t really triggered through to even lowering economic activity or reducing consumption,” Weber said.

Friday's job report was a sign the economy is cooling, he said. Payrolls growth slowed to its weakest level in six months in April as the economy generated 175,000 new jobs, and average hourly earnings slowed to 3.9% in April from 4.4% in January. That's a potential signal the service prices that have held up inflation may moderate and bring core PCE inflation closer to the Fed's 2% target from after stalling at 2.8% in the latest report.

POWELL UNITES FOMC

Chair Powell has done a good job of communicating the scenarios the Fed is working with, and in keeping some degree of unity across FOMC members, Weber said.

“The statement by Chair Powell, of having a more data driven approach, saying this is our kind of current status quo this is our reaction function, but if inflation stays stubbornly high we might not actually move, that’s how I would interpret the statement,” he said. (MNI INTERVIEW: Fed Cuts Timeline Pushed Back - Reinhart)