MNI INTERVIEW: Trump Win Would Risk Ending Fed Cuts- Rosengren

The Federal Reserve appears poised to cut interest rates by 25 basis points in September but if Donald Trump wins the presidential election in November another Fed cut would be less certain in December and renewed hikes could be back on the table depending on the administration's fiscal policies, former Boston Fed President Eric Rosengren told MNI.

The June CPI and PPI data offered more evidence that disinflation is back on track and the Federal Reserve will ease interest rates in September, he said in an interview Friday, ruling out a November cut and adding that beyond that there is greater uncertainty.

"It's possible in December, but I think it's a little less certain, depending on what the fiscal policies are that are going to be going forward."

Rosengren's baseline view of the outlook sees continued improvement on inflation, giving the Fed flexibility to ease rates. "I would expect that inflation will be good news, but it's not going to be such dramatic news that the Fed feels like it has to ease dramatically," he said, noting a bigger 50 basis point cut in September is "unlikely" unless labor markets soften significantly.

STARK FISCAL TERMS

Trump's proposal for a 10% across-the-board tariff on imports and a 60% or higher tariff on imports from China, and his promise for the largest deportation of unauthorized immigrants in history, would have implications for the path of U.S. monetary policy, Rosengren said.

"The fiscal policies that are being discussed by a potential Trump administration would certainly be inflationary. Tariffs by definition raise prices and deporting a significant number of people that are in service jobs would also probably increase wages and prices in the service sector," he said Friday.

"If those two policies become embedded in the forecast, I think it will be harder for the Fed to continue easing, if that's the most likely scenario in their forecast," he said. "It's a 2025 event, but the Fed has to respond to forecasts." (See: MNI INTERVIEW: Dec Fed Cut Doubtful If Trump Wins -Obstfeld)

This does not mean the Fed would be acting politically, said Rosengren, but rather simply taking into account a potentially drastic shift in fiscal policies that would affect the economic outlook.

"It's not that the Fed should be focused on who's president, but if there's a significant fiscal policy change that has to be fed into the forecast and if that implies higher inflation, it wouldn't make sense necessarily to reduce interest rates in responding to current data while expecting that future data would reverse," Rosengren said.

"If Trump is elected and he continues to say the policies are going to be led with the tariffs and deportations, I think it would be very unlikely that [Fed policymakers] do something in December that might have to be offset the following meeting."

TERMINAL RATE

The path of Fed policy in 2025 and 2026, as well as the terminal funds rate, are "very dependent" on who wins the election and how much of their policy agendas get implemented.

"Fed funds futures rates indicate continued declines for next year. So I find that a bit of an anomaly, if you think that the most likely outcome right now is a Trump administration successfully implements what he said."