MNI INTERVIEW: Fed Won’t Consider Cuts ‘Til At Least May-Groen
MNI (WASHINGTON) - The Federal Reserve is likely to keep interest rates on hold again at its next meeting in March if not for longer as it awaits further improvement in inflation data, former New York Fed economist Jan Groen told MNI.
“May would be the earliest opportunity for them to maybe reconsider cuts,” said Groen in an interview Thursday. “Two rate cuts is the upper bound of what they could achieve this year.”
Groen is less sanguine than Fed Chair Jerome Powell that the inflation trend will become more benign in the first half of this year. The Fed chief has emphasized the expectation that shelter costs will gradually cool, but Groen cited a number of countervailing factors, including the possibility that Trump’s tariffs will have a more lasting effect than expected.
“If you look at surveys, market commentary, people are building into their outlook a kind of inflation risk premium based on all the fears about tariffs and things like that. The UMich longer-term survey inflation expectations survey, if you look at like the distribution of the responses, really shot up a lot half of 2024,” he said.
At the same time, Groen thinks the FOMC has been too quick to dismiss the ongoing threat from wage pressures to inflation.
“Everybody seems to say that wage growth has weakened a lot, but it’s still very robust,” he said, adding that it’s “still running at a pace that's higher than what you would expect to be in line with 2% inflation over the medium term. So there are other factors that push in the opposite direction of housing services inflation.”
Fed Chair Powell said during his press conference Wednesday that the economy seems “to be set up for further progress, but being seem to set up for it is one thing but having it is another.” The central bank kept rates on at 4.25-4.5% Wednesday, while indicating policymakers are in no hurry to cut again.
EXTENDED PAUSE POSSIBILE
If the inflation data remain stubborn through the first half of 2025, officials might choose to stop cutting rates altogether, Groen said.
“If by the midpoint of the year you’re still uncertain then it’s almost certain that you’re just going to sit tight where you are and ride out the end of the year,” he said. (See MNI INTERVIEW: Fed On Hold, Next Move Could Be Hike-Andolfatto)
One dovish aspect of Chair Powell’s press conference was his assurance that he still believes policy is "meaningfully restrictive,” indicating he still sees several more rate cuts before getting to neutral.
In contrast, Groen believes policy is “just about” restrictive, with years of loose U.S. fiscal policy having raised the neutral rate of interest.
“Fiscal policy being on a less sustainable plan probably made Treasuries a less appealing safe asset, meaning that the relative demand for Treasuries has gone down. Of course, the supply has gone up, because higher deficits means issuance of more bonds, so that in itself is a force that, all else equal, would push up r-star,” he said.