MNI INTERVIEW: One Fed Cut Most Likely 2024 Outcome-Keister

The Federal Reserve will likely only manage to cut interest rates once this year given stubborn inflation pressures, and might even refrain from cutting at all in 2024, former New York Fed economist Todd Keister told MNI.

“The fundamental factors driving inflation are a bit more persistent than people had hoped, and I always kind of felt the pricing in of three cuts this year seemed optimistic,” said Keister.

A third month of hotter-than-expected CPI this week raised concerns that price pressures could prove more lasting and forced many market participants to push back their expected timing and extent of Fed rate cuts. (See MNI POLICY: Fed's Rate Cut Timeline Shaken By Inflation Bumps)

“There's a lot of uncertainty. It's not inconceivable to me it would be none,” said Keister, now a professor at Rutgers University. “If I had to pick a number as the most likely – one, maybe.

“Some people are willing to talk about maybe it's even going to be a hike. I don't know, that seems like a big swing. I think it would take a lot of negative readings for that to happen.”

Keister said there’s a lack of clarity around what is fueling prices at the moment.

“I feel like I don't understand what's driving inflation. Other people seem to have more confidence about that and why it's going to come down. I still don't know what to expect. Is it going to turn around? Where are we going to be for the rest of the year? That seems wide open.”

Fed policymakers have said they need more confidence inflation is heading sustainably down to their 2% target before they feel comfortable reducing interest rates, currently at a 23-year high of 5.25-5.5%.

STRONG JOBS

A strong job market provides policymakers with another reason to proceed with caution, said Keister.

“If the labor market were weakening, as people kind of expected, then wage pressures would come down and that would help on the inflation front,” he said. (See MNI POLICY: Fed Won't Hesitate To Ease If Employment Falters)

The neutral rate of interest, or r-star, is potentially higher than before the pandemic, meaning monetary policy could be less restrictive than it appears, Keister said.

“Since the pandemic it appears we've entered this new regime and it's probably going take a while to figure out where the r-star in that regime is. Each piece of evidence that comes in with the labor market strong and inflation, at the margin has to be pushing out people's estimates of r-star,” he said.

“This economy is stronger than we thought. All the factors that pushed r-star down over the 20 years before the pandemic, maybe, some of those have reversed, maybe some of those are just less strong than they used to be. That has big implications for whether we think we’re at a very restrictive policy stance or maybe only a slightly restrictive stance right now. It's hard to say.”

QT TRIAL AND ERROR

The Fed’s plan to slow the pace at which it’s shrinking its balance sheet “fairly soon” as flagged in minutes of its March meeting will involve testing the waters as to what constitutes an ample amount of reserves in the banking system, said Keister.

“There's going to probably be some trial and error. Like we've done in the past, you shrink for a bit, you get a minor blow up somewhere and then you learn from that,” he said.

“It’s kind of unavoidable, so many things have changed over the last 15 years, it’s just hard to know. We have experience with a very small balance sheet and a very large balance sheet. We have almost no experience in the middle.”