MNI INTERVIEW: Fed Rate Guidance Muddled By Chair Transition
The Federal Reserve could consider a shift in the language of its statement next week to acknowledge the risk that a downward path in interest rates is no longer assured, but such a change is complicated by the transition to a new Fed chair who doesn't believe in forward guidance, Jonathan Wright, a former staffer at the Federal Reserve Board, told MNI.
"Something more two sided does make sense, but it would be an unusual time for doing big changes to the language when it could be the Chair's last FOMC meeting," Wright said. Some Fed officials saw a strong case for a two-sided description of future interest rate decisions in the statement, according to March Fed meeting minutes.
"Some little hint that things are more two-sided would would seem quite possible," Wright added the Fed statement next week.
Fed officials have recently signaled they are in no rush to cut rates again and have warned about the compounding price pressures of repeated supply shocks in an environment when inflation has been above target for years and the central bank's credibility is being questioned.
SHADES OF THE 70s
"The Fed could be more comfortable about saying it was going to look through inflation from Iran, if it hadn't been for the Covid inflation and if we'd been in the situation where inflation had been too low for the previous 10 years. But coming after the Covid inflation, it's it's harder for them to do that," said Wright, a Johns Hopkins University economist.
"There are shades of the 1970s here. We often forget that inflation picked up in the 1970s not because of one event, but because of a sequence of shocks," he said. (See: MNI INTERVIEW: Long Fed Pause Looms On Iran Shock - Sahm)
If anything, monetary policy is a bit easy for the circumstances, and it's certainly quite possible that interest rates are at the neutral real funds rate now, he said. "That's a strange place to be with inflation running too high."
"But given there's a high bar for switching between tightening and easing cycles, I think that the right thing to do is to just stay where things are," Wright said. "I've come to think that until something breaks with the labor market, they are on hold for probably for this year, certainly for the next few meetings. And I think that if Warsh is confirmed and comes in trying to ease quickly, he will face a lot of pushback from the FOMC."
NEW CHAIR
Fed Chair nominee Warsh failed to project independence at his hearing earlier this week, Wright said. "I was not convinced at all of his protestations of independence," he said. "I think the story of wanting to ease monetary policy because of a productivity boom just feels very much like the conclusion determining the assumptions."
Other reforms like pushing away from forward guidance and having a smaller balance sheet make sense. But Warsh's comments on the need for a new inflation framework and new model concerned Wright. (See: MNI INTERVIEW: Warsh Signals Caution On Balance Sheet Plans)
"What worries me is that the model that they will pick will be the one that is politically convenient, and that's not the way it should be," he said. "It's easy to be unhappy with the forecasts you've got. It's much harder to come up with better ones." (See: MNI INTERVIEW: Warsh Fed Reform Agenda Faces Hurdles-Gagnon)
