MNI INTERVIEW: Fed Likely To Hike Another 75BPs In Sept-Haslag

The Federal Reserve is likely to deliver another aggressive 75 basis point rate hike in September to catch up with an inflation problem that officials failed to foresee, ex-Dallas Fed economist Joseph Haslag told MNI’s FedSpeak podcast.

That kind of move is needed “just to get to the path that almost everybody agrees they’re going have to get to," Haslag said. "So why hold off – that’s going to be the essential driving force around the table.” (See MNI INTERVIEW: Fed's Harker Wants Rates Above 3.4% By Year-End)

“Fifty basis points is a possibility – I wouldn’t rule it out completely – I’d just put less probability on that than I do on 75 at this stage. I think it’s cooked in, I think the markets are ready for it and the past couple weeks have reflected that painful updating process.”

Chair Jerome Powell delivered hawkish remarks at Jackson Hole last week that drove stock prices lower and bond yields higher. Wall Street was looking for a possible dovish pivot but instead got the shortest ever Wyoming speech that signaled a focus on restoring price stability even at the cost of increasing economic pain. (See MNI INTERVIEW: Fed's Bullard Says Rates Could Be 'Higher For Longer)

INFLATION NOT SO BAKED IN

Powell made clear he's trying to ensure inflation doesn't become entrenched in business and consumer expectations, avoiding the need to act even more aggressively later, Haslag said.

While inflation of the 1970s is similar to today’s because of supply shocks, Haslag said Powell benefits from the Fed’s credibility dating back to the Volcker shock. That’s why the fed funds rate is likely to peak around 4% or a little bit below as the Fed has predicted, he said.

“Inflation is starting to be baked in a little bit but it’s not so baked in that we’re risking double-digit inflation,” said Haslag.

While the Fed’s characterization of “transitory” inflation was ridiculed and later abandoned, Haslag sees the big price gains as temporary, just over a longer period. Trimmed mean measures “are all coming in somewhere between 3.5% and 5%. That seems to be a pretty good gauge of what’s going to happen, what we’re looking at by the end of the year,” for headline inflation, he said.

CALMING MARKET SIGNALS

Market measures of inflation expectations also give the Fed some relief. “They’re telling us there’s not a lot of great fear that inflation is going to be persistent,” Haslag said.

The inverted yield curve is another market signal that's not as worrisome as some economists have suggested, he said. “Yield curve inversions have predicted way more recessions than we’ve actually experienced."

While Haslaq doesn't see a recession as inevitable, it wouldn't take much to tip the economy into a short contraction. “We’re dealing with an economy that could be headed for a recession,” he said. “The whole soft landing business is really about fairly fine tuning points about whether we’re above zero or below zero.”