MNI: Fed Biased To Ease With Focus On Jobs - Ex-Officials

The Federal Reserve is still inclined to keep cutting interest rates as policymakers worry predominantly about employment weakness, even if the bar for additional easing is higher with borrowing costs closer to neutral, former central bank officials and staffers told MNI. 

“I read the direction of travel as dovish. While the SEP highlighted the hawkish disagreement around the table, the chair's comments clearly placed more weight on the cooling labor market dynamics than inflation,” said former Kansas City Fed President Esther George.  

Fed Chair Jerome  Powell "dismissed any consideration of higher rates, leaned pretty clearly I thought on productivity effects without saying that suggests higher neutral, and protested too loudly in my opinion that ‘reserve management purchases’ were not at all related to monetary policy," she added.   

Policymakers are putting too little weight on persistently high inflation, and the Fed could hold off on further cuts until it waits for a leadership transition, George said.

"I worry that pressures are growing on the Fed to accommodate massive Treasury issuances through asset purchases and lower capital requirements for banks," she said. "Continuing to de-emphasize inflation is a mistake regardless of assumptions about tariffs and expectations."

PERSUADABLE

Joseph Wang, a former New York Fed staffer, said the FOMC could well be persuaded to ease again over the next couple of meetings. 

“Powell mentioned he viewed jobs data as significantly overstated, and also that he viewed inflation excluding tariffs as only slightly above target. That seems to me to qualify for an easy policy stance, even as we are currently above neutral,” Wang said. “So cuts in January and March sound reasonable. This would be derailed by strong jobs prints.”

Rick Roberts, a former Fed system executive who also worked at the Kansas City Fed, thinks the Fed remains in easing mode despite the effort to message renewed caution, which was likely a compromise to get the hawks on board. 

“Three sequential cuts plus bill buys read as the opening salvo of an ongoing and likely to continue easing cycle unless incoming data argues otherwise. Moreover, the data will have to be very convincing given the administration's ongoing influence on the FOMC — it seems to be the early part of an ongoing easing cycle to me, not the conclusion of an adjustment period,” he said. 

PRODUCTIVITY 

Importantly, Powell's embrace of the possibility that strong productivity growth could be a more permanent feature of the economy also portends lower rates. 

“The Fed's soft endorsement of the productivity story widens its tolerance band. So, strong growth no longer equals inflation risk, while soft labor data equals a reason to cut. The reaction function becomes asymmetric -- ease on weak data, but don't tighten simply because of strong growth,” Roberts added. 

“This provides Powell's Trump-appointed successor with more analytical headroom to argue that deeper or faster cuts are consistent with the Fed's mandate. By leaning in a narrative of stronger supply side performance and productivity gains, the Chairman has effectively broadened the set of policy rates that the Fed can defend as consistent with stable inflation.” (See MNI INTERVIEW: Fed Faces Politically Tumultuous Year - Bullard)

Peter Ireland, a former Richmond Fed economist, said the latest rate cut was a prudent move given relief in non-tariff inflation and weakening labor market conditions -- as is the decision to "wait-and-see" before making any further cuts.  

“The implicit message that the Committee will await further news on the evolving state of the economy before committing to additional reductions in rates strikes me as appropriate as we still haven't gotten inflation back down to the 2% target,” he said.