MNI INTERVIEW: Fed Won't Consider Cuts Until March - Benigno
MNI (WASHINGTON) - The Federal Reserve will hold off from considering another interest-rate cut until March at the earliest as the central bank assesses President-elect Donald Trump's policies and determines whether there are any structural changes in the underlying economy that would call for a higher-for-longer stance, former New York Fed staffer Gianluca Benigno told MNI.
"I would not expect them to do anything in January and possibly later," he said in an interview. While it's "reasonable" the Fed sticks to its most recent projections showing two 25 basis point cuts in 2025, the risks are tilted toward a higher for longer policy rate, Beningo said. "There is so much going on, so much data coming from now until March. They will wait."
The Fed's monetary policymaking committee dynamics are shifting, he noted. Additionally, if fiscal policy remains loose with a deficit around 6% of GDP again this year then it will be even more unlikely for inflation to reach the Fed's inflation target.
STRUCTURAL ADJUSTMENT
"I have expectations that the economic outlook for the United States is going to be very similar to what we have seen in 2024 in terms of GDP growth, in terms of a healthy job market, and also with inflation," said Benigno, who previously led international research at the New York Fed.
"It will be difficult to get to 2% and it will be around 2.5% for most of the year," Benigno said. "What we see now -- this bumpy behavior on inflation -- is basically the byproduct of the fact that aggregate demand is strong and supply is slowly adjusting to the fiscal policy impulse." (See: MNI: Fed's Inflation Fears Back On Rise, Even Before Tariffs)
"It is very difficult for the Fed to achieve the target with the extent to which fiscal policy is expansionary," he said. "I see more pressure coming from the fact that the fiscal policy is relatively expansionary in the United States, and the fiscal policy is what is driving the economic cycle," said Benigno, now professor at University of Lausanne.
The latest FOMC meeting suggests the Fed already has its eye on Trump’s inflationary policy changes. The central bank will need to consider whether the new administration's policies on immigration, tariffs, and spending will lead to non-linearities in the economy.
"For 2025, we need to think in terms of, are there going to be structural shifts that might influence the Fed's job and how do they take that into account?"
So far, Trump's tariff threats are unlikely to be big enough to ripple from sector to sector through the economy, Benigno said.
America is a relatively closed economy and that means a 10% tariff is unlikely to provide a big enough shock that would propagate through various sectors and provide a structural shift to alter the course of the Fed, he said. "A big shock that propagates? That's a risk that could change the outlook for monetary policy."
While the Fed is expected to be more hawkish, rate hikes are unlikely, he said. "I find low probability of a hike but I wouldn't rule that out, conditional on a structural shift," Benigno said.
SPLIT COMMITTEE
There is a view within the FOMC that rates have to stay restrictive to tame inflation, Benigno said. "The narrative has shifted again from the labor market to inflation."
"It was very significant to me to see the divergence between FOMC participants in the last meeting," Benigno said, noting a total of four officials preferred holding rates steady at the last meeting. Chair Jerome Powell in the press conference called the decision to lower rates in December by 25 basis points a close call.