MNI INTERVIEW: Fed On Hold Until Tariff Pause Passes- Lockhart

Federal Reserve officials are likely to support a holding pattern for interest rates until at least the end of the 90-day delay in President Trump's reciprocal tariffs program expires July 8, former Atlanta Fed President Dennis Lockhart told MNI. 

If the pause expires with some trade deals, then the Fed could potentially keep the policy path of gradual easing it sketched out in December, Lockhart said. If instead the tariffs come into force as intended, officials would need to prepare for a stagflationary environment and rising risks of a global recession, he said. 

"The preferred course of action for the Fed is to justify cuts that amount to continuing the movement toward a neutral positioning of policy and the removal of rates associated with the spurt of inflation post-pandemic," Lockhart said in an interview. 

"But the downside case is a very negative dynamic of both a U.S. recession and a slowdown worldwide, those things reinforcing each other and the Fed very definitely in a stagflation environment." 

"I would be very inclined to wait until July 8 and see what follows this pause," he said. (See: MNI INTERVIEW: Fed On Hold For A While, Rate Direction Unclear)

Trump's trade actions so far have yet to clarify whether he intends to prioritize trade deals focused on leveling the playing field or a long-term onshoring of manufacturing in the United States, Lockhart said. The latter would amount to structural protectionism that suggests tariffs will be in place for a number of years. 

"Because these two objectives are to an extent inconsistent, it’s not clear to me which direction the administration is going to go," he said. "If there are trade deals, then I think you can look through recent and near term uncertainty-caused volatility and look forward to things calming down." 

DATA STILL SOLID

Last week's data haven't yet changed the narrative for the Fed, despite much hand-wringing about inflation picking up or a coming recession, Lockhart said. Employers appear to be holding their position in terms of staffing while consumer spending remained healthy in the first quarter. Headline and core PCE inflation were flat in March. 

Futures traders are pricing in three cuts by year-end, starting July. But until the tone of the data shift, Fed Chair Jerome Powell will continue to emphasize uncertainty, acknowledging that tariffs are a major contributing factor without discussing them too much lest his comments veer into political criticism, Lockhart said. 

"For now, the committee can bias communication toward a focus on inflation and inflation expectations because they don't have trouble brewing yet in the employment picture," he said. 

"If they saw announced layoffs and unemployment jump and a real reversal in the still-benign employment situation, they may change their tune," Lockhart said. (See: MNI INTERVIEW: Fed Needs More Hawkish Message - Emmons)