MNI INTERVIEW: Fed Could Soon Lean Toward Rate Hikes-Giannoni

Federal Reserve officials are increasingly worried about high inflation and could start thinking about hiking rates soon if price pressures do not ebb, former Dallas Fed research director Marc Giannoni told MNI. 

“If inflation does not come down as we would expect and as the FOMC is expecting, then they will need to make some adjustments, then I would imagine they hike,” said Giannoni, now chief U.S. economist at Barclays, in an interview. 

He still thinks the most likely outcome is for the Fed to remain on hold until the end of 2027, but sees a “narrow path” to avoiding rate increases given the elevated inflation figures. (See MNI INTERVIEW: Fed Right To Hold Off On Hikes For Now - Keen) 

HAWKISH DISSENTS

Indeed, he noted the possibility of hawkish dissents as early as the July meeting, given sentiments expressed in minutes to the June decision.

“It’s quite possible. We had participants saying they would have favored a hike as early as June. They could get along with a hold, but if they were left to their own devices they would have preferred to hike. Those individuals will almost surely want to hike again in July,” he said.

The only thing FOMC members need to nudge them away from a wait-and-see stance and into hiking mode, Giannoni said, is for inflation to appear to be settling well above target rather than following the gradual decline officials expect after an energy-related bump. “If that does not happen, we are pretty close to having them switch to hikes earlier." 

While inflation pressures have been exacerbated by tariffs and the Iran war, Giannoni said the outlook for prices was not favorable even before the start of the conflict. 

The most important inflation surprise of the year has been the boost to prices from an ongoing boom in AI investments, which might eventually become disinflationary but right now is working in the opposite direction, he said. 

“The biggest risk and the biggest factor to us that affects PCE prices is this inflation in categories like software and computer accessories, which is related to the AI investment boom, the huge demand for chips and memory and things of that sort,” he said. 

COMMUNICATIONS VACUUM

Giannoni, also a former New York Fed staffer, said he welcomed some of Chair Kevin Warsh’s changes to communications, but hopes he does not take central bank circumspection a step too far, leaving financial markets to guess how the Fed will react to incoming data. 

A much shorter policy statement, for instance, is a welcome change, he said. Warsh’s critiques of shortcomings in the Summary of Economic Projections are also justified. 

“I think the dot plot has long been recognized as having flaws, in particular because it presents a simple projection by each individual under a certain scenario that can be completely different across individuals,” he said. 

That doesn’t mean it should be jettisoned, but rather replaced with something that offers more clarity and information rather than less, he added. “Moving away from that without having a good replacement, I think would be very problematic.”

At the same time, Giannoni would like the new chair to offer more detail both on how he is thinking about the current state of the economy as well as some hints of the Fed’s reaction function under his tenure. 

“This idea that somehow financial markets are going to derive pure signals about the economy and its future when they don’t get that communication at the central bank – it’s a risky operation,” he said. “Market participants have no choice but to form expectations about what the Fed is going to do. If the Fed doesn’t say anything, then you go by what you have, and you may misinterpret what they say.”