MNI INTERVIEW: Fed Expected To Cut Rates Late In 2026- Ireland

The Federal Reserve should be able to lower interest rates in the second half of the year because underlying prices pressures will remain on a downward trajectory, former Richmond Fed economist Peter Ireland told MNI.

"The inflation picture is encouraging, but unclear," he said in an interview. "There's a general sense that the labor market is soft, and so all of that supports the idea that the funds rate should continue on a downward course."

Still, the Fed is likely on hold for at least the next couple of meetings. "There's enough uncertainty that it's also reasonable to ask, should the Committee just wait and see? Wait for more clarity before moving further?"

President Donald Trump's nominee to lead the central bank, Kevin Warsh, is likely to be approved by the Senate Banking Committee on Wednesday just before what could be Jerome Powell's last appearance at the FOMC press conference. 

"Overriding all of this is the anticipation of changing of the guard at the top. My feeling would be in light of that, that the Committee will be hesitant to make any changes," said Ireland, a member of the Shadow Open Market Committee, a group of private academic economists that acts as the Fed’s outside watchdogs.

"I do think that at present monetary policy is not grossly mis-calibrated, but policy is still slightly restrictive. I think productivity growth will be stronger than expected, economic growth stronger than expected, and the long intermediate term trend in inflation will still come down."

For that reason, Ireland said he would be supportive of a couple more rate cuts before year-end, "simply recognizing that as the trend in inflation falls back to 2%, the funds rate should continue en route back to its long-term natural rate." (See: MNI INTERVIEW: Chances Rise Fed On Hold Through 2026 -Lockhart) 

WARSH NOMINATION

If confirmed by the full Senate, Warsh could become Fed chair in May and preside over his first meeting of the Federal Open Market Committee on June 16-17. Warsh outlined during his April 21 confirmation hearing that he plans “regime change” at the Fed, with reduced emphasis on forward guidance, a smaller balance sheet and a more focused role for the central bank on a narrow definition of monetary policy.

Warsh may seek to scale back the Fed’s use of forward guidance, when policymakers signal how monetary policy may trend over time, said Ireland. At his confirmation hearing, Warsh declined to commit to holding a press conference after each FOMC meeting. 

"What is clear and what even Chair Powell admitted to is that the Fed really struggled with its communications during 2020 and 2021, after the whole transitory versus persistent debate," Ireland said. The Fed in late 2020 committed to keeping rates pinned at the zero lower bound until the labor market reached maximum employment, inflation had risen to 2%, and prices were on track to moderately exceed 2% for some time.

Ireland said it is also reasonable for Warsh to look at communications from policymakers who speak on a regular basis. It can lead to a cacophony of voices that doesn't advance a message as it pertains to the underlying monetary policy strategy, said Ireland, now at Boston College. 

Also, the Warsh Fed should consider communications around balance sheet policy and whether it does or does not have to be coordinated with movements in the federal funds rate, he said. "It seems clear in retrospect that it became messy" during Covid, and delaying rate increases. "All of that needs to be reconsidered in light of what did happen."