MNI INTERVIEW: Fed Risks Overcutting As Inflation Lingers

The Federal Reserve will likely be going too far in easing monetary policy if it lowers interest rates again as widely expected next week, RDQ Economics chief economist John Ryding told MNI. 

That’s because inflation has been above the central bank’s target for several years and remains stubbornly high while the risks to the job market are not as severe as the more dovish members on the FOMC appear to believe, said Ryding, who started his career at the New York Fed and the Bank of England. 

“I don’t think the Fed should be cutting rates. I don’t see the need,” said Ryding in the latest episode of The FedSpeak Podcast. “We haven’t been at the Fed’s inflation target in over five years. We were at the Fed’s estimate of full employment in August.” (See MNI INTERVIEW: High Bar For More Cuts As Neutral Nears-Kaplan)

A December move is even less urgent considering the Fed will be getting key data on jobs and inflation that were missing during the government shutdown soon after the December 9-10 meeting, and would be better served to wait to make a decision, Ryding said. 

NOT RESTRICTIVE

“Powell said if you’re driving into a fog, you naturally slow down. But the Fed seems to be choosing not to do this. In fact this move does not seem to me to be data dependent,” said Ryding. 

He noted that Powell argued in October that a December cut was not a foregone conclusion though after remarks from two key regional Fed presidents, John Williams of New York and Mary Daly of San Francisco, the prospect of another quarter point reduction has become all but priced into markets.  

Ryding said monetary policy does not appear especially restrictive at the moment, meaning additional rate cuts are probably taking borrowing costs below neutral levels and thus stimulating an economy that doesn’t especially need the extra boost, he said.

“If monetary policy were still restrictive, why is inflation not moving down towards target? I think the Fed is underestimating where the long-run neutral rate is.”

TRUMP FED

Despite President Donald Trump’s ongoing calls for lower interest rates, Ryding believes the Fed’s latest Summary of Economic Projections will show the median Fed official is willing to cut once more next year. 

He said steep divisions within the FOMC will make it an uphill battle for even a very dovish Trump-appointed replacement to Chair Jerome Powell to push rates much lower. 

“It’s going to be very challenging. It’s not going to be easy to get that very low interest rate that the president wants,” he said. 

Any effort to do so, including by strong-arming regional Fed presidents or other unconventional means, would lead to punishment from already jittery bond markets, predicted Ryding. 

“Whoever it is does have to negotiate the rest of the committee. Now, if this committee is having difficulty and is more diverse in its views on policy, having spirited debates with Chair Powell as chair, what is it going to be like when you have, say, for example, Kevin Hassett as chair?” he said.