MNI INTERVIEW: Inflation Drop Looks Sustainable-Fed’s Wright

U.S. inflation looks set to moderate steadily in coming months, allowing the Federal Reserve to soon pause monetary tightening before holding rates at cycle peaks at least through 2023, St. Louis Fed economist Mark Wright told MNI.

“I’m fairly confident that inflation is sustainably on a downward path,” said Wright, senior vice president at the St. Louis Fed, told MNI in a FedSpeak podcast interview. “The conditions are ripe for inflation to continue steadily declining for the next 12 months.”

He noted the Fed’s preferred PCE measure of inflation has fallen to 5% in the year to December from peaks above 7% in the summer, while core PCE had also moderated to 4.4%.

“Both of those are heading in the right direction,” said Wright, a former research director at the Minneapolis Fed.

The Fed raised interest rates by a quarter percentage point to a range of 4.5-4.75% last week, reducing the pace of tightening from previous moves but indicating that “ongoing increases” would be appropriate.

A FEW MORE

“As the statement revealed and Chair Powell reiterated, ongoing increases are likely. So there’s probably a few more increases in the pipeline coming,” Wright said. “At that point, the Fed would be able to pause and we’d end the year at that interest rate.”

Markets are expecting rates to peak slightly below 5% while the Fed’s Summary of Economic Projections from December pointed to a cycle top of 5.25%.

“We need to remain vigilant, inflation is still high, prices of some services components are still growing strongly,” Wright said.

His forecasts for inflation this year are in line with the SEP, which sees PCE ending 2023 at 3.1%. He said housing sector prices should shift from being a boost to a drag on inflation later this year.

“Data that we see on current rents being negotiated suggests they’re coming down, so that’ll begin to exert more of a moderating effect on inflation in the second half of the year,” he said. (See MNI INTERVIEW: CPI Rent-Passthrough May Be Longer-Detmeister)

JOBS STRENGTH

Wright pushed back against the notion that robust job growth, with over half a million gains in January, would force the Fed to become more aggressive in its tightening.

“The recent jobs report was very, very positive, that’s consistent with a bunch of other indicators that suggest the labor market is still quite strong,” he said.

“We’ve already seen some moderation of inflation without the labor market weakening, I think that’s good. We have a dual mandate and so far it’s looking like we might be able to achieve close to both of them, which is very positive news.”

He downplayed the disconnect between market pricing of rate cuts and the Fed’s pushback against that idea.

“Maybe they’re not exactly in line with what we’re suggesting but they’re not too far away,” he said.

What exactly higher for longer will mean “depends entirely on the data,” he added.

“If unemployment remains low and inflation continues to fall, at some point it will be appropriate to begin to think about lowering rates again, but I think we’re going to need to see inflation get much closer to the 2% target for that to happen.”

As for wage growth, Wright said it was more a consequence of inflation – workers catching up to past losses in their purchasing power – rather than a primary driver of it. (See MNI INTERVIEW-Fed Model Suggests Wage Growth Normalizing Soon)