MNI INTERVIEW: Fed Will Resist Pressure To Cut In '23 -Blinder

The Federal Reserve may avoid hiking interest rates beyond 5% if inflation keeps slowing while resisting pressure to cut for longer than investors expect, former vice chairman Alan Blinder told MNI.

Blinder sees continued tight policy even as he predicts most of the pain from rate hikes on the U.S. economy is still to come. That's because most of the inflation slowdown so far is from improving global supply chains rather than Fed action to create slack in the labor market, he said.

"The first few points of inflation reduction the Fed gets almost for free," he said. "The part that is slack in the economy -- bringing down wage increases and service prices -- is the harder part. It will come slowly and gradually."

"We haven’t seen hardly any of the pain yet," he said. "I don’t think they’ll be cutting soon. The bottom would have to fall out of the economy for that to happen. The question is how much higher they're going to go and at what pace."

SLACK NEEDED

While some longer-term bond yields have tumbled in recent weeks on bets the Fed will begin to trim rates next year, officials have pushed back in the comments around Wednesday's half-point hike and again on Friday at a talk by San Francisco President Mary Daly. The Fed's latest projections suggest a peak rate of about 5.1% by the end of next year.

The Fed has become more pessimistic about the rate hikes needed after its early inflation optimism was proven so wrong, Blinder said. But if better-than-expected inflation keeps up for another three or four months: "I don't think the Fed's going that high."

Still, Fed officials are glossing over how higher rates will be felt in the job market, Blinder suggested. The unemployment rate is likely to crest closer to 5% than the 4.6% projected by the FOMC this week, he estimates.

"What it's going to take is more slack. That’s what the Fed is trying to do without saying much about it," Blinder said.

WEAKENING HAS BEEN MODEST

The jobless rate and hiring numbers "haven’t moved much yet" in that kind of direction, he said. The unemployment rate at 3.7% remains below the Fed's estimated equilibrium level. Monthly payroll gains have come down to about 260,000 from half a million earlier this year but remain more than double the 100,000 needed to keep up with workforce growth.

Workers quitting at higher rates and striking for heftier raises across the country are also indicators of strength, he noted. Wages are showing little movement up or down, and that's reflected in elevated service prices, he said.

While the Fed may be willing to approach recession territory to meet its inflation goal, the stock-market sell-off on recession fears is unjustified, Blinder said. Disappointing retail sales and PMI data this week point to an economy that's weakening, but at a modest pace, he said.

"It doesn’t look to me that indicators are pointing to a recession more than a couple months ago," he said. Odds of a soft landing actually appear to be improving on the back of better inflation numbers and not-as-weak real growth numbers, he added.