MNI INTERVIEW: 'Nothing Good' In CPI - Ex-Fed Board's Kamin

The Federal Reserve will be even less inclined to cut interest rates soon after the latest inflation data showed a third month of firmer-than-expected readings that included broad-based gains, former Fed board economist Steven Kamin told MNI.

“There’s nothing in those numbers that can save the prospect of a June cut. No matter which way you slice the data, there’s nothing good there,” he said, citing a third month of 0.4% monthly gains in core CPI.

Upside risks to inflation will remain prevalent in FOMC members’ minds after the new batch of numbers indicated that the stalling of disinflation from the start of this year is persisting, he said.

“Most of the disinflation we achieved over the past year has been due to goods prices, which is probably attributable to supply side considerations. As long as services remain at a high rate of inflation you’ve still got a problem,” said Kamin, formerly director of the Fed board’s Division of International Finance.

At this point, he expects the central bank to cut interest rates just twice this year, “but with low conviction.” (See MNI INTERVIEW: Fed To Cut Once Or Twice At Most In 2024 -Pakko)

“I can’t believe [Fed Chair Jerome] Powell would favor rate cuts in the current environment – the main people that want the rate cut are the market. His numero uno priority has to be to get inflation down,” said Kamin, now a senior fellow at the American Enterprise Institute.

While he is still hopeful that shelter costs will start to abate as lower values for new rental leases begin to become reflected in the Labor Department’s housing inflation measures, Kamin admits to surprise at how long it has taken.

“Three months in a row of higher-than-expected price growth, including core price growth, combined with only the slowest pace of disinflation in wage growth, leads one to put more weight on the so called ‘last mile’ hypothesis, that the last part of this inflation is gonna be a lot tougher than the first part,” he said. (See MNI POLICY: Fed's Rate Cut Timeline Shaken By Inflation Bumps)

NOT THAT RESTRICTIVE, YET

Ebullient markets, including record-setting stocks, are keeping financial conditions fairly loose, thus bolstering economic growth and employment, according to Kamin.

“Right now monetary policy is not being very restrictive in the sense that it's not really restricting economic activity or prices by that much,” he said.

“But I do see a material risk that policy could become restrictive – if the buoyancy of the stock market went away, if American households finally work through the rest of their excess savings, and if for some reason economic activity started to flatten.”

Such developments would raise debt service costs for households and individuals in a way that could significantly drag on economic activity, Kamin said.

“You could imagine the higher interest rates starting to bite– its’ a risk.”

MORE HEADROOM

Kamin is hopeful that rising productivity will create more room for non-inflationary wage growth, even if the current pace of gains at over 4% remain above the level which the central bank sees as consistent with price stability, which would be closer to 3.5%.

“Real wages now are in the neighborhood of where they were pre-pandemic, whereas productivity has grown by about 2 or 3 or 4% depending on how you measure it. So there’s a little bit of a gap remaining between where we are and where we ought to be,” he said.

“That allows some opportunity for wage growth to basically exceed price growth but still be consistent with a convergence to a new low inflation equilibrium.”