MNI INTERVIEW: Fed Backing Away From 2025 Cuts, Says Lacker

Federal Reserve officials are slowly admitting persistent inflation could stifle any interest rate cuts this year, and they would be well advised to prepare markets for the prospect of increases if trade wars lead to renewed price pressures, former Richmond Fed President Jeffrey Lacker told MNI.

“What we’re seeing is backing away from anticipation of any cuts this year,” Lacker said in an interview. 

Fed officials last week penciled in two rate cuts for 2025 in their latest Summary of Economic Projections on median, but the latest dot plot also showed a more hawkish and narrower distribution of views.  

“The median didn’t move but you could see the center of gravity moving away from cuts,” Lacker said.  “I think they’d be well advised to convey a more balanced outlook, in other words, to prepare markets for the possibility of the necessity of a rate increase. Now four say no cuts, another four say one cut, the median is going to pop up.” 

For now, it makes sense for the central bank to keep rates on hold to see the effects of a flurry of policy changes out of Washington, tariffs in particular, on the economy’s performance and the path of inflation, he said.  

“Standing pat for some time is going to make sense until it’s clear that there’s a predominant concern one way or another,” Lacker said.  

STAGFLATIONARY FORCES

He thinks the most likely outcome of the on-again off-again tariff policies is “some combination of stagflationary forces,” and worries that while long-run price expectations remain anchored they might be more fragile after the recent inflation episode. (See MNI INTERVIEW: Fed Must Dampen Stagflation ‘Vibes’ - Roberts)

“It's not clear that they would remain as stable in the presence of a surge in short run inflation, accompanied by a rise in short run expectations and all. At this point, their commitment, their credibility has been distinctly weakened by the episode we went through,” he said.

That would make it hard to react to any economic weakness that comes from tariff wars.  

“It’s a tough dilemma for the Fed. An out and out easing campaign isn’t an obvious first choice,” said Lacker, who also sees recent wage figures as pointing to sticky cost pressures.  

“My reading of the wage data suggests that they still aren't there on the nominal wage front, in terms of getting to some configuration that's consistent with 2%.”

NONLINEAR RISKS

Lacker said that while claiming policy uncertainty is high can be a cliche, the Fed was justified to do so in last week’s meeting. 

“There's times where it's objectively true and you can document that uncertainty is unusually high, and this is one of them,” said Lacker. “The big risk is that the concrete data through February has been pretty solid. But the data about the outlook has shown clear evidence that there's a lot of uncertainty and a lot of apprehension about the policy environment.”

That probably helps explain why policymakers were still holding onto the prospect of additional rate cuts in their outlook -- the potential for a nonlinear, unexpected shock.  

“Policymakers have to be aware of the risk of something like what happened in the fall of 2008 where the uncertainty engendered by just shocking things out of Washington like Lehman, AIG, the attempt to persuade Congress to pass the TARP legislation, which involved comments about Great Depression 2.0 and the like, that caused American consumers and businesses to just head to the sidelines, just take their take the ball and go home,” said Lacker.