MNI INTERVIEW-Inflation Slowdown Should Allow Fed Pause-Tilley
Recession is the base case of the ex-Philly Fed advisor -- but he sees a soft landing as possible.
U.S. inflation is likely to resume its downward drift in coming months despite bumps along the way, allowing the Federal Reserve to pause its rate increases after a few more hikes, former Philadelphia Fed economic advisor Luke Tilley told MNI.
Fed Chair Powell’s decision to open the door to a 50-basis-point interest rate hike was understandable given a hot streak of recent data and big revisions to CPI that provided an entirely different picture of how the year ended, said Tilley, now chief economist at Wilmington Trust.
“Three-month annualized basis core inflation was 8% in the middle of last year and had slowed to 3% by the end of last year. With those revisions it shifted a lot of inflation from the first to the second half of the year. Now instead of a 5% deceleration now it’s something like a 1.5% to 2% deceleration,” he said in an interview with MNI’s FedSpeak podcast.
“Inflation looked a lot more sturdy at the end of the year and now they to respond in kind with the rate hikes.”
Tilley said that whether the Fed goes 50 or 25 basis points at its March meeting will depend heavily on the outcome of the upcoming CPI report for February on Tuesday.
“If it continues to show that stubbornness in the categories that concern them the most then, absolutely, they’ll return to 50 basis point hikes. And if it doesn’t you would expect a 25 basis point move,” he said. (See: MNI INTERVIEW: Fed Should Hike 50BPS If Data Stay Strong-Kohn)
“Most likely is two 25-basis-point hikes or one 50-basis-point hikes getting you to 5.25% or 5.5% at the top of the range. And then if we continue to get the slowdown in inflation that I think is still there, despite it looking a little different after the seasonal adjustment changes, then it’s going to be a very different picture six months from now. We’ll have hit that peak in rates and the next question will be if they’re cutting any time soon.”
RECESSION BASE CASE, SOFT LANDING POSSIBLE
Tilley said he ascribes a 55% probability to the economy entering a recession this year but also sees a 40% chance of a so-called soft landing where the economy slows and inflation comes down without slipping into outright contraction.
“If you happen to continue to get a slowdown in those inflation categories and they happen fast enough the Fed doesn’t have to hike as much,” he said. “If you get people returning to the labor force and you get lower wages there’s no reasons we shouldn’t get a soft landing.”
Tilley said strong job growth in itself was not a reason for worry as long as wage growth eases gradually.
“I don’t think job growth is a problem by itself but we need to continue to see a slowdown in wages,” he said.
The latest jobs numbers for February showed just that, with a robust gain of 311,000 new jobs accompanied by a slowing in average hourly earnings of 0.2%.