MNI INTERVIEW: Risk Next Fed Move Is A Rate Increase - English

The Federal Reserve is likely to cut interest rates once this year, but if inflation remains sticky and the labor market does not show greater signs of easing in the next few months then the central bank could raise interest rates higher, William English, a former director of the Fed's division of monetary affairs, told MNI.

"My most likely scenario is still that they cut rates at least once this year but it's uncertain and there's also a not insignificant chance that they'll have to raise rates," he said in an interview Thursday.

The economy continues to look "a little bit hot" and wage growth remains above levels thought to be consistent with the Fed's 2% inflation target, English said. "Over the next few months, they may well find that they need more slack to get inflation to come back down to target and that will mean at the very least a longer period with rates at current levels." (See: MNI INTERVIEW: Fed Only Likely To Cut Once This Year- Giannoni)

UNDERLYING STRENGTH

This week, figures from the Department of Commerce showed that personal consumption expenditures inflation was 3.4% in the first three months of 2024, up from 1.8% in the final three months of 2023.

"If you're the Fed, this inflation is worrisome because this suggests the inflation is kind of settling in at a higher level than you want," English said. "The inflation numbers have been surprising and disappointing for the last few months now."

Still, the former secretary to the FOMC suggested Fed officials will be questioning whether surprisingly low inflation at the end of last year could be canceled out against this year's surprisingly high inflation and so still be considered to be on a broad downtrend. Over the next few months it will assess whether prices have become stuck at a level higher than the central bank's 2% target, he said.

"The underlying strength and momentum in the economy definitely seems strong," he said, acknowledging first quarter GDP was below estimates of trend growth. "It's not obvious that there's a problem, but there's been some discussion of could the next move be an increase?"

"The next move could be an increase if inflation really does just gets stuck around 3% and the economy maybe slows up but it doesn't slow much," English said. "At some point, I think the committee would have to say, 'we can't just wait for the economy to eventually slow and for inflation to eventually fall. We have to be active in defense of our 2% target.'"

English emphasized a rate rise is not his base case. "I'm not there yet, for sure, but I think they can get there in another few months if inflation keeps staying high and the economy keeps trucking along."

NEED FOR SLOWING

The economy will need to continue to slow for inflation to get where officials want it to be, English said. "The upshot today was the economy slowed down some and that is more or less the thing people think should be happening but the inflation numbers were not good."

"Policy may not be all that tight right now just given everything else and they could be in a real bind if the economy doesn't slow that much and inflation stays high." (See: MNI INTERVIEW: Kaplan Says Loose Fiscal Is Holding Up Fed Cut)