MNI INTERVIEW: Powell Opens Door To End Of Fed Hikes-Weinberg

Federal Reserve Chair Jerome Powell’s view that real interest rates are “meaningfully positive” creates the prospect of halting further increases if inflation keeps moderating, former Richmond Fed research director John Weinberg told MNI.

“Powell’s statement opens the door for this being the end of the tightening cycle, but whether it is will depend on ongoing inflation data,” he said Thursday.

U.S. consumer prices rose 3% in the year to June, the lowest since March 2021. Core inflation was still up 4.8% annually but that was down from 5.3% in May and the lowest since October 2021. An upcoming report on the PCE is expected to show a similar decline.

“The one-month drop in core was sizable, and it does move my estimate of near term trend inflation down, but still only to something around 4 at an annual rate,” Weinberg said. “If the June report gets followed by one or two more core readings with a three or less handle, so that the real funds rate starts to look like something over 2, then policy will start to look meaningfully restrictive.”

MEANINGFULLY RESTRICTIVE

Powell argued during his post-meeting conference that inflation-adjusted interest rates are already “in meaningfully positive territory.” It was “more so after today's decision” to boost the fed fund rate target range by another quarter point this week to 5.25%-5.5%, the chair said. (See MNI INTERVIEW: Monetary Rules Say Fed No Longer Behind Curve)

Weinberg thinks that’s probably not a universally held view within the Fed, even if it does point to a possible cessation of tightening. “My guess is that there is a range of opinions on the committee about that.”

Judging how tight real rates are “requires an estimate of the near term trend and near term expectations of inflation. If you look to core to get information on the near term trend, then before the most recent CPI print, it looked like the real funds rate was running at around 1% or less - so not very restrictive.”

Now, he says, there have been changes to both sides of the equation – rates are a bit higher and inflation a bit lower.

“Both work to make the assessment of the stance of policy more restrictive. But by how much, and is it enough?”

If core inflation readings remain around 4% “then I would suspect that rates would need to go up a bit more,” he said.

RATE CUTS DON’T PRECLUDE QT

In response to a question from MNI, Powell said the central bank could continue to shrink its balance sheet even when economic conditions call for an eventual reduction in interest rates.

“That could happen," Powell said. "There are two independent things. The active tool of monetary policy is rates. But you can imagine circumstances in which it would be appropriate to have them working in what might be seen to be different ways -- but that wouldn't be the case."

Weinberg said he agrees with the chairman.

“I don’t see any problem with lowering rates should it become necessary while continuing to run off the balance sheet,” he said. “This far away from the lower bound on rates – and this far away from the minimum level of reserves necessary for the effective conduct of monetary policy – I think the effects of run-off are small, especially when the run-off is proceeding in a mechanistic, well anticipated fashion.”