MNI INTERVIEW2: Fed To Cut Once At Most This Year- Ghamami

The Federal Reserve has room to cut interest rates just once later this year at most with inflation staying elevated and a higher neutral rate making monetary policy less restrictive, SEC economist and former Fed board researcher Samim Ghamami told MNI.

“I don’t think the Fed should cut rates in the near-term, not until they are confident that inflation is stable. There’s a significant chance that we get at most one rate cut this year,” he said on MNI’s FedSpeak Podcast. Strong growth and employment also reduce any sense of urgency, Ghamami said.

The Fed this week flagged limited progress on inflation as it held rates steady at a 23-year high of 5.25%-5.5% for a sixth straight meeting. Chair Jerome Powell said it will take longer to gain confidence inflation is returning to the Fed’s 2% target after a string of disappointing readings.

“Because of the Fed’s credibility, they will try to bring inflation closer to the target before starting cutting rates,” said Ghamami, also an adjunct professor at New York University. (See MNI INTERVIEW: Fed Rate Cuts Timeline Pushed Back-Reinhart)

UNDER-ESTIMATING NEUTRAL

High public debt and deficits are likely pushing up neutral interest rates he said, taking some bite out of the Fed’s tightening after the Covid shock led to the highest inflation in four decades. “Based on what we have observed in the past several months I really think policymakers have underestimated the level of real short-term neutral interest rate,” he said.

Inflation pressures are still persistent, Ghamami said, and there’s a chance prices could remain sticky. At the same time, there has been a lot of progress and things are at least not getting worse.

“We could have shifted to a new era where prices could be stable at an inflation target of around 3%. That could well be the case,” Ghamami said. “From January to March the inflation readings have not been positive but at the same time, at least in terms of core PCE, they have been below 3%.”

That measure rose 2.8% in the year to March, while the core CPI jumped 3.8% over the same period. The Fed’s official target is the PCE.