MNI INTERVIEW: Lockhart Sees Fed On Hold 'Til At Least Midyear
MNI (WASHINGTON) - The Federal Reserve is likely to wait until midyear or later in 2025 to reduce interest rates any further, after assessing whether inflation has continued to cool and what priorities might have emerged from the incoming Trump administration, former Atlanta Fed President Dennis Lockhart told MNI.
"No cut in January is a foregone conclusion. March represents a chance to evaluate any policies announced by the Trump administration, but it will be still early to draw any conclusions as to the effect of new policies, so I’m inclined to believe they’ll skip that meeting as well," he said in an interview.
In the meantime, the FOMC will keep rates at the current target range of 4.25%t to 4.5% and pour over inflation data with a fine-tooth comb, Lockhart said.
"My best guess on the next cut is mid-year to the second half, which buys a fair amount of time to draw conclusions over whether inflation is going to be sticky or disinflation will resume." (See: MNI INTERVIEW: Fed To Cut Once Or Twice This Year-Friedman)
REASON TO BE NERVOUS
On balance, the FOMC will be reluctant to fire too soon with rate cuts, after adjusting rates down 100 bps from their pandemic-era peak last fall, Lockhart said.
Fed Governor Chris Waller's assessment this week that core inflation is getting close to target and could justify as many as four cuts this year if continued likely represent a more dovish view than those of other FOMC members, Lockhart said.
The directors of four regional Fed banks – Dallas, Kansas City, Minneapolis and St. Louis – favored no cut in rates on discount-window loans ahead of the December Fed meeting, Lockhart noted, signaling a "fairly significant constituency wanting a more hawkish approach" on rates policy.
"There's good reason to be nervous about inflation," he said. "It's pretty evident why someone would not be fretting about the employment side of the mandate, whereas the picture on inflation is more ambiguous." Various measures of underlying price pressures show inflation stuck around 2.5% coming into 2025.
FEELING WAY TO NEUTRAL
A majority of FOMC officials last month said they saw just two cuts in 2025, but Lockhart cautioned investors not to put too much weight on the December Summary of Economic Projections because individual assumptions on new trade and fiscal policies varied widely. Futures traders are pricing in a first cut by July and a second by early next year.
"Some new administration decisions could come as early as next week, and once they’re implemented, could have a quick effect on the economy. As an FOMC member, you can't say more until you know more."
Despite analysts' view that President-elect Donald Trump's promises to impose aggressive tariffs, immigration curbs, deregulation and cost cutting across the federal government would likely be inflationary, rate hikes are not part of base case thinking at this time, Lockhart said.
Rates are still above median estimates of neutral, and Fed officials will be cautiously feeling their way along "with a real strong impulse not to overshoot," he said.
"There are times in which it was fair to say the Fed was the only game in town. I don’t see that as the case in 2025 and 2026. I think very impactful decisions will be made on the fiscal side, and it will be much more of a process in which the Fed has to take into consideration fiscal decisions in projecting the likely path of the economy."