MNI INTERVIEW: Fed Right To Hold Off On Hikes For Now - Keen

The Federal Reserve should wait to see how much inflation comes down in the next few months following an easing of Middle East tensions that have brought oil prices sharply lower, Benjamin Keen, a former consultant and visiting scholar at several regional Fed banks, told MNI. 

“A lot of the inflation was being driven by oil prices, and we’re starting to see oil prices go down. I would expect in the coming months for that to show up in the data,” he said.  

“The Fed still wants to get the economy back to its long run 2% inflation target,” said Keen, adding that whether rate hikes will be needed to achieve that outcome has “yet to be determined.”

Fed officials are right to be worried about above-target inflation, and Chair Warsh’s focus on price stability is understandable given economic conditions and his priors as a Fed governor during the 2008 financial crisis, said Keen. (See MNI INTERVIEW: Fed Can't Ignore Mounting Prices Pressures-Liang) 

NO RUSH 

Still, the direction of price pressures is not uncertain, and Warsh and the FOMC are probably right to take their time before rushing into any tightening move. 

“Based on what they’re seeing in the data, that seems to be a reasonable course of action,” said Keen, an associate professor at the University of Oklahoma. 

Like Warsh, Keen is optimistic about the prospect that the AI boom could unleash a new wave of productivity that also helps keep a lid on prices. 

“We could raise the natural rate from productivity build out, but as AI comes along and lowers per unit production cost, those will eventually be passed on to the consumer in terms of lower prices or lower growth in prices, which means what productivity shocks are disinflationary,” he said.

At the same time, the labor market is showing little hint of the kind of weakness that would require more accommodative policies from the Fed, said Keen.

“The macro data does not show the labor market needs support.  We do have a segment of the labor market, recent college graduates, that we have a problem with. But overall the macro environment looks good. That’s the Fed’s job, to worry about the overall macro. The Fed doesn’t need to be in the business of targeting unemployment rates for groups,” said Keen.

CONSENSUS

Warsh is trying to build consensus not just on the path of interest rates but also on his stated push for reform in areas like communications and the balance sheet, Keen said. 

The chair is right to shun forward guidance in a highly uncertain environment, he added. 

“It’s the assessment of the chair that forward guidance is tying our hands to some degree,” he said. “There’s a benefit to doing it when we are at the zero lower bound, but right now it comes with a greater cost because if the market is expecting one thing and they’re doing something different because new information has come in, then it’s going to catch the market by surprise.”

The Fed is still likely to want to avoid major market surprises, but the shift in communications approach could throw some curveballs.  

“We've gotten used to the current paradigm for a while, and now what he's suggesting is let's change that paradigm, and let's go back to, we walk into every meeting, we have a discussion on the facts on the ground, and the data that we're seeing,” Keen said.