MNI: Fed June Dots Likely Split On 1 Or 2 Cuts - Ex-Officials

Federal Reserve projections for interest rates this year are likely to cluster around either one or two cuts, as in March, while the median could remain at two amid limited clarity as to how the economy is likely to evolve in the second half of the year, former Fed officials told MNI.    

"The circumstances call for a placeholder projection on the part of committee participants. There's not a strong reason to change the dots unless something's changed in the economy, which it has not," former Atlanta Fed President Dennis Lockhart said in an interview.  

It would take only two officials who penciled in two cuts in March moving in a hawkish direction to shift the median to one cut for 2025, but with little conviction regarding the outcome of tariff negotiations, officials are more likely to stick with earlier forecasts and wait and see how things play out, the ex-officials said.  

"The June Summary of Economic Projections will likely resemble the March outlook, as overall economic uncertainty has not shifted significantly," former Fed staffer Rick Roberts told MNI.

Former Fed Board of Governors economist Joseph Gagnon expects the FOMC to be on hold all year as inflation rises more than unemployment.

"They may still show one or two cuts this year in the dot plot because they don’t want to change that yet," he said. "By early next year, inflation should be heading down and unemployment still creeping up, so they will be able to cut." 

Lockhart also wouldn't rule out the possibility that the Fed does not cut at all this this year.

"But sometimes when you’re dealing with a very high degree of uncertainty as well as a somewhat ambiguous set of circumstances, it’s best to submit a placeholder which may not reflect a great deal of conviction – recognizing that making a big change could be misinterpreted," he said. (See: MNI INTERVIEW: Fed Will Face ‘Tough Calls’ In H2-Holtz-Eakin) 

INFLATION RISK

The prospect of a spike in inflation related to tariffs, which could come as either a one-time increase or as a trigger for a more persistent pattern, is a risk the FOMC cannot ignore, the ex-officials said. 

The FOMC’s core PCE inflation forecast in particular bears watching. "The recent softer inflation data may reflect firms front-running expected tariffs — a temporary dynamic that could reverse as those trade measures begin to take effect in the coming quarters," Roberts said. The Cleveland Fed projects core PCE inflation to rise a tenth to 2.6% in May, two-tenths below where the FOMC in March expected it to end the year. 

Taking the Atlanta Fed staff's projection of the current level of tariffs adding 1 percentage point to inflation over the next year as a starting point, "it probably argues for holding until you get a sense of whether some kind of inflationary process has been triggered that runs the risk of getting away from you," Lockhart said. "The recent Middle East events and oil price effects are an additional source of uncertainty." (See MNI INTERVIEW: Fed Surveys Track Which Firms Will Raise Prices)

Policymakers are likely to watch closely for shifts in inflation expectations, unanticipated pricing behaviors on the part of businesses and any cost factors that prove more potent, he said. 

"They seem to be leaning toward viewing inflation as the priority objective that employment ultimately depends on."

UNCERTAIN OUTLOOK

The key questions confronting the committee earlier in the year remain as relevant as ever, Lockhart said. 

"Will a trade war materialize that suppresses economic activity and leads to a sharper downturn at the same time there's a spike in inflation? Will the immigration enforcement actions of the administration negatively affect sectors dependent on legal and undocumented migrants. And will that lead to a slowdown?" he said. "Then you have to add the fiscal situation. Will that push market-determined rates higher and tighten financial conditions?"  

"Patience is a virtue in the current environment, and we need to allow time for additional data to reveal how these evolving risks will ultimately play out," Roberts said. (See MNI INTERVIEW: Hiring Softer But Not Enough For Fed Rate Cuts)