MNI INTERVIEW: Five Fed Cuts In 2024 Are 'Plausible' -Wilcox

Smaller rent increases alone can see core inflation fading to 2.1% by the second half of 2024, creating a path for the Fed to slowly dial back interest rates as soon as March, former Fed Board research director David Wilcox told MNI, and market bets on five reductions next year is plausible.

His back-of-the-envelope calculation assumes two of the three major core PCE inflation subcategories -- goods and services excluding housing -- continue trundling along. A slowing in the pace of increases in asking rents, according to Yardi Matrix data, puts downward pressure on shelter inflation over the next year.

The exercise "provides a useful starting point for a conversation," Wilcox said in an interview. One could argue core goods prices might not decline as rapidly as they have recently, he said, but there are also better-than-even odds of core services prices outside of housing easing faster.

"The risks are pretty balanced. This is is not an aggressive projection. It's well within the cone of uncertainty around likely inflation outcomes next year," he said. (See: MNI INTERVIEW: Fed Could Cut Rates As Early As Q1 - Weinberg)

ANXIOUS TO ACCOMMODATE

The U.S. central bank has been on hold since July awaiting confirmation inflation is moving down decisively. "But the groundwork is being laid that in the next few months, they will feel comfortable cutting," Wilcox said. And while market pricing for as many as five rate cuts by end-2024 is "a little aggressive, it's also very plausible," he said. Wilcox is senior fellow at the Peterson Institute for International Economics and director of U.S. economic research at Bloomberg Economics.

There's less urgency to adjust policy at the December meeting because 10-year Treasury yields have retreated over 80 bps since their peak in mid-October, with an immediate impact on borrowing costs, Wilcox said. Chair Jerome Powell will instead try to hold the line and take pains to emphasize the uncertainty of the outlook, Wilcox said.

Policymakers are rightly cautious that disinflation won't proceed along a straight path, especially after the October CPI report delivered an extremely favorable result, Wilcox said. But by March enough data will likely have accumulated to justify a pivot. (MNI INTERVIEW: Fed Focus On Service Prices In Tough Last Mile)

"They will see enough reinforcement of the evidence that inflation is durably and convincingly moving back down to 2% and likely additional evidence of slackening in real activity," he said. "That will make them anxious to provide a little more accommodation."

MORE PERFECT THAN HOPED

Wilcox noted disinflation this year has been accompanied by good news in the labor market. He estimates that only 30,000 to 40,000 additional payrolls a month are needed to absorb new entrants into the labor force given the aging population. Employers added 199,000 jobs in November and the unemployment rate declined to 3.7%, the Labor Department said Friday.

"What has become increasingly clear is if we have a recession it would be quite a mild one, because there’s so much less disinflation to be accomplished," he said.

"A mild recession that would likely take care of the remaining inflation problem, coupled with the utterly amazing performance we’ve had thus far together, would be a pretty remarkable package."