MNI INTERVIEW: September Fed Cut 'Not Assured' - Lockhart

MNI (WASHINGTON) - Federal Reserve officials will want to see more favorable inflation data before making a "tactical recalibration" of their benchmark interest rate, so a September cut -- currently fully priced in by traders -- isn't a done deal, former Atlanta Fed President Dennis Lockhart told MNI. 

A potential Donald Trump victory in the U.S. presidential election further complicates the calculus by the end of the year, as officials must consider the inflationary consequences of his 10% across-the-board tariff proposal, Lockhart said.

"We have to wait and see what data they get between now and September. If there's any ambiguity on the inflation momentum, then September is not a sure thing," he said in an interview. 

Neither would a first cut mark the start of a methodical easing campaign, he added. "It’s not necessarily the beginning of a cycle that will produce some number of cuts. It could be more of a recalibration to nurture the soft landing and then keep it open as to when the second cut may come."   

By the December meeting, if Trump is elected, "they have to be looking ahead. And if that kind of inflation shock is possible, I think they’d be reluctant to continue cutting rates."

NOT BEHIND THE CURVE 

Headline and core PCE inflation dipped below 3% last quarter after an unwelcome resurgence in the first three months of the year. But with two more CPI and job reports to come before the conclusion of the September 17-18 FOMC meeting, Fed Chair Jerome Powell is likely to proceed with caution, Lockhart said. 

"They recognize the last mile has proven to be difficult. Disinflation has resumed, but if anything it’s gradual and inflation is still a long way from 2%," he said.  

Meanwhile, the labor market is "very far from collapsing," he said. "Companies continue to hold on to workers where they might have let them go pre-Covid, and as long as people are employed they will consume." (See: MNI INTERVIEW: Fed Could Be Forced To Play Catch Up - Coronado)

So rather than explicitly setting up a September cut in the policy statement next week, "they could tweak the language to say we’re getting closer and closer, and perhaps give Powell license to make suggestive statements in the press conference, to advance the idea." (See: MNI INTERVIEW: Fed To Open Door To Sept Cut Next Week- English)

SOFT LANDING INTACT

A soft landing remains very much within reach, Lockhart said. 

"Growth is slowing but still above trend and very healthy. The labor market is normalizing. Disinflation has resumed and inflation is gradually working toward target," he said. "A soft landing is being realized. That’s the working narrative." (See: MNI INTERVIEW: Fed Won't Start Cuts Until Dec Or Later-Fuhrer)   

In that same vein of protecting that historically rare outcome, U.S. central bankers will act in anticipation of new risks from a Trump administration's economic policies.  

"You really have to take some of the policy suggestions at face value," he said. "They’d have to take seriously the possibility that a tariff regime is put in place that would contribute to inflation. The committee would not want to be cutting too deeply with that as a prospect."