MNI INTERVIEW: Fed On Hold Until At Least December - Lacker

The Federal Reserve is likely to keep rates for much of 2025 as the Trump administration’s on-again off-again trade war makes it difficult for central bankers to weigh tariffs’ inflationary effects versus their drag on growth, former Richmond Fed President Jeffrey Lacker told MNI. 

“I don’t see anything before the very end of the year, like the last meeting or so. I think in September the situation will probably still be murky and they’ll be on hold there too,” Lacker said in the latest episode of MNI’s FedSpeak Podcast. 

That’s because the volatile nature of ongoing trade negotiations means their economic effects will be uneven, and take many months for policymakers to untangle, Lacker said.

“The choppiness is going to be evident. With China, you saw exports surge to get ahead of the tariff, plummet when it looked like the tariff was going into effect. Now they’re going to surge but there’s a 90-day horizon – they’re going to do same thing all over,” he said. (See MNI INTERVIEW: Fed Could Hold Rates For Some Time-Kaplan) 

HIKES POSSIBLE

The presumption that the next move in rates is downward is premature, said Lacker, who thinks that really depends on the inflationary effect from tariffs, which could be significant even after a recent de-escalation of tensions.  

“A 10% tariff is going to leave a trace on inflation and those dynamics are going to be difficult to manage,” he said. “If it gets to December and inflation is 4% at an annual rate, they should raise rates, even if unemployment is rising.”

That’s because inflation was already hovering well above the central bank’s 2% target even before the trade war. 

“The true gauge of the stance of monetary policy is the real federal funds rate. If inflation bumps up and inflation expectations go with it – and inflation expectations have risen by many measures –  that makes policy easier. 

So if you just keep the nominal fed funds rate constant, you’re easing policy as inflation surges,” said Lacker. “They have to keep that in mind as well.”  

SUBSTANTIAL BURDEN

Lacker said the U.S.-China trade reprieve this week does appear to take the worst-case scenario off the table for now. But he said uncertainty is still high and the remaining tariffs are still sufficient to throw sand in the gears of economic activity. 

“I am pleasantly surprised that the threshold for just how much face saving the White House needed to take the off ramp was pretty low, and so that bodes well for the whole sequence of these reciprocal tariff negotiations they have going on for the next couple of months,” Lacker said. 

“But it looks like the path we're on is towards something with 10% tariffs and maybe some extra in some other cases. That's still a substantial burden, it’s still nothing to sneeze at.”

The attrition is likely to put upward pressure on inflation and downward pressure on economic growth in ways that are difficult to predict, and will thus prevent businesses from making long-term decisions. 

“Fits and starts like that, it chews up senior management bandwidth at small companies especially,” he said.

Likewise, it will keep Fed policymakers on the sidelines for the foreseeable future. 

“In the case of a supply shock it’s not clear that the optimal policy is to cut rates," said Lacker. "If manufacturing investments are taking time, if people are buying less imports, if those adjustments are taking time, the Fed can’t speed that up. It’s not obvious that an unemployment rate increase requires a rate cut.”