MNI INTERVIEW: Fed Seen Cutting Twice This Year - English

The Federal Reserve is likely to cut interest rates twice this year but it is still uncertain whether the first rate cut will come at the central bank's September meeting, former director of the Fed Board's division of monetary affairs William English told MNI.

"My outlook is similar to that in the SEP that the committee published at the last meeting in June. I don't think the data since then has been particularly surprising," he said. The Fed's June Summary of Economic Projections showed the median official expects two 25 basis point rate cuts by the end of the year. 

"The uncertainty is really high and so I think they want to wait and be sure that they're getting more or less the effects that they think they're going to get from the tariffs and see a little bit more what happens to inflation expectations, that they remain pretty well behaved, before they get on with cutting rates.," he said. 

English expects the Fed next week to suggest that it could cut rates in September if data continues to be in line with its expectations, but that the FOMC’s June guidance is "vague enough" to give them a lot of room for maneuver.

"I could imagine a kind of trade off, where the statement would be a bit more dovish, but no rate cut, and that might keep one or both of the governors who've indicated an inclination to cut this month on board to wait until September,” he said.

NEW RULES?

President Donald Trump has made it almost a daily routine to attack Fed Chair Jerome Powell over the central bank's stance of holding rates due to tariff-related inflation risks. Even if Trump were to install a politically partisan chair, it is far from certain that the rest of the committee would support a dramatic shift in policy, said English, now at the Yale School of Management.

“The FOMC with the two new members a year from now isn't going to be all that different than the FOMC today, and I just don't think it's going to be easy for the new chair to get the votes on the committee for 200 basis points of cuts," he said. 

"The President would like to have lots of rate cuts. I don't think that's going to happen unless somehow Congress changes the rules, the courts change the rules, or there's much more turnover on the FOMC than I currently expect." (See: MNI INTERVIEW: FOMC To Go Own Way If Chair Lacks Credibility)

While he admitted to some concern of a rule change permitting more turnover in the FOMC, this is a less likely scenario, he said. (See: MNI INTERVIEW: Trump Won't Fire Powell - Republican Senator) 

“I think there are enough people in the Senate who understand that they need to be a little careful here - that a lot of damage could be done,” he said.

 "If you go back to the 1930s when the FOMC, the current structure of the FOMC, was created by Congress, they very consciously set up a structure that the president couldn't dominate," said English, pointing to a recent paper by Gary Richardson and David Wilcox. "There are people in Congress now who would similarly understand the risks and would not want the Fed to be a part of the short-term political process in this country that would lead to bad monetary policy."

SOLDIER ON

Meanwhile, the Fed needs to tune out the pressure.

"The best they can do, the only thing they can do, is use their best judgment, make their best policy decisions and soldier on," English said, warning that the appearance of caving in and being inappropriately political would have potentially big effects in financial markets.

"That makes it less likely that inflation expectations will stay well anchored. Longer-term rates could go up, which would be unhelpful and could make it more difficult to achieve the low, stable inflation that they're aiming for,” he said. "You want to be careful that the fact that you're being pushed at by the administration doesn't lead you to push back and inappropriately not cut when you should cut."