MNI INTERVIEW: Quarterly Fed Cuts To Start In Dec - Reinhart

The Federal Reserve is likely to begin cutting interest rates at a quarterly pace starting in December, and the bar to significantly deviate from that plan will be high, Vincent Reinhart, former director of the Fed's division of monetary affairs, told MNI.

"It really does feel like one and done in 2024. We are not expecting the rate cut until December," said Reinhart in an interview. "The Fed is on this slow march downward a quarter point every quarter starting in December, unless activity softens and then they cut a lot," he said. Discrepancies in market pricing is "just a matter of what probability do you attach to activity softening."

The median Fed official projected just one rate cut for the year at the June FOMC meeting this week. Eight out of 19 officials saw two cuts this year, which Reinhart views as the minority. The median view showed four more cuts in 2025 and four in 2026. (See: MNI INTERVIEW: FOMC Won’t Agree On Cuts Until December-Pingle)

"The plan is to realign the nominal funds rate to a lower level of inflation, and this is a medium term plan," Reinhart said. "And they try to find a sweet spot between balancing keeping policy restrictive to get inflation lower and not tightening so much as to crimp aggregate demand and risk a downturn."

HIGH FOR A BIT LONGER

The Summary of Economic Projections also showed the median Fed participant sees interest rates at the same place at the end of 2026 as in previous projections, Reinhart noted. "The story they are saying is we just can be high for a little bit longer given what we can think about inflation."

That general plan is pretty impervious to modest changes in the inflation outlook, he said. "The tenth here or tenth there in inflation doesn't matter, but the plan would be tossed out the window if activity softens and there is an abrupt downturn. They would go from planning mode to reactive mode."

In the meantime, the Fed will have discretion to choose the optimal time to begin rate cuts, and that is waiting until after the presidential election in November, said Reinhart, now chief economist at Dreyfus-Mellon.

"Essentially, if you're following a plan about realignment, you've got some discretion. Use that discretion to make yourself more confident. So delay the story. Use that discretion to make sure you stay out of the headlines at awkward times. Don't start cutting right in front of the election."

WAITING TO HIT GOAL

Fed Chair Jerome Powell this week also said the central bank's next framework review will begin late in the year and will cover the Fed’s communications strategy.

Until the Fed meets its goals, policymakers will put off talking about the big picture, Reinhart said.