MNI INTERVIEW: Job Weakness To Keep Fed On Easing Path-Tilley
MNI (WASHINGTON) - The Federal Reserve will keep cutting interest rates next year because the job market is weaker than it looks on the surface and policymakers have said they do not want to see it weaken any further, former Philadelphia Fed economic advisor Luke Tilley told MNI.
“I expect they'll be totally normalized down to 2.75 to 3% by the end of 2025,” said Tilley, now chief economist at Wilmington Trust.
Fed officials trimmed expectations for rate cuts next year to just two from four next year. But Tilley believes recent sticky inflation readings are a bump in the road on an otherwise steady disinflation path toward the 2% target and that worries about economic weakness will become much more prominent by the March projections. (See MNI INTERVIEW: Higher Trend Growth Means More Fed Cuts-S&P)
“The Fed is comfortable with the labor market and worried that inflation is going to worsen. We are comfortable with inflation and worried that the labor market will worsen,” he said.
“I look around at all the data. I don’t see any problem with inflation at all in any way shape or form. If you look at the entire CPI and remove shelter, it has been at the Fed’s target for 19 months. Consumers are not out there buying up a storm and forcing businesses and retailers to raise their prices," Tilley added.
JOB WORRIES
He is particularly worried about the composition of employment growth, which he says is indicative of weakness that cannot be seen in monthly job gains that still appear robust.
“Private job growth is 108,000 on average for the past six months, we've had an inordinate contribution from government. So the total looks stronger, but private job growth is weak, and job postings are falling,” said Tilley.
“The other part of it is that of the private job growth over the past year, two thirds has come from education and health.”
TARIFFS A GROWTH RISK
On the inflation side, one big concern looking ahead is the prospect of another price shock to the supply chain from proposed tariffs by the incoming administration of President-elect Donald Trump.
But Tilley said the prevailing view is misguided, and that tariffs would hurt growth before they bolster inflation.
“I think it would be net deflationary, because large tariffs would be such a big hit to consumers’ wallet that they would retract and you’d end up having a recession,” he said.
Concerns about a possible spike in Treasury yields should provide some restrictions on the new administration’s ability to blow out deficits recklessly, said Tilley.
“The 10-year yield is going to be the limiting factor on fiscal policy and like, pushing through like tax cuts and expensing and all of this kind of stuff. If you’re really blowing out deficits over a longer period the market is going to react, and then that's going to be more challenging for them to enact all of this.”