MNI INTERVIEW: Fed September Cut Not Assured - Rosengren

A quarter-point interest rate cut is still not the most likely outcome of the Federal Reserve's September meeting despite a weaker-than-expected jobs report, because next month's decision will be heavily dependent on additional inflation and employment data to come out before then, former Boston Fed President Eric Rosengren told MNI.

"It's probably too soon to expect a September cut to be the most likely outcome," he said in an interview. "It's still kind of a coin toss whether they do anything in September at all, but if the next employment report indicated a significant decline in payrolls, if firms start cutting back very substantially and that appears in the data, then the Fed will react if they think that we're actually going into a recession."

The market's estimated probability of a rate cut surged on Friday to 80% after the Bureau of Labor Statistics reported hiring fell to a trickle in the last three months. 

"I think it's a bit of a overreaction," said Rosengren. "It may turn out that that's what happens if the labor market data continues to weaken. But I could also imagine a situation where the labor market continues to have an unemployment rate not that much different than where we are and the inflation data becomes more of a concern." 

FEDERAL POLICIES

Economic data is in the early stages of showing the impacts from the Trump administration's policy changes. "The stagflation that many economists were worried about as a result of the variety of policy shocks looks like it is showing up in the data that we are seeing this week," Rosengren said. (See: MNI INTERVIEW: Inflation Could Stifle 2025 Fed Cuts - George) 

"If you were worried that tariffs were going to start causing prices to increase, the areas that you would expect it to be showing up are in goods prices, particularly things like durable goods, furnishings, household appliances, and if you look at the PCE report, that's exactly where it was showing up," added Rosengren, now at the MIT Sloan School of Management. 

"I'm expecting we'll continue to see more as businesses find that the level of tariffs would hurt earnings too much and they'll be forced to raise prices over the next few months."

The former Boston Fed chief attributed recent payroll employment weakness to a combination of federal government policy shocks as well.

"If you look since May, there have been significant declines in the federal workforce. If you look at areas where deportation of labor would have a big impact, you'd expect that construction employment in houses and commercial real estate would be an area that has significant number of immigrants. That number also is negative. And finally, manufacturing is being distorted by a variety of tariff shocks," he said. 

CHALLENGING FOR FED 

He expects both the inflation and employment pictures to deteriorate at the same time, forcing the Fed to make a judgement on which side of the dual mandate requires more immediate attention.

"Putting the inflation data and the employment data together, it's particularly challenging for the Fed because it looks like the inflation data is going to continue to be higher than what the Fed wants," said Rosengren. "I don't think the two dissents [at this week's FOMC meeting] are particularly indicative of what's going to happen in September," he added. 

"For the Fed, it matters what the relative magnitudes of the impact on inflation versus the impact on labor markets, and that's going to take more data. I don't expect more clarity from the Fed until probably Jackson Hole, where there will probably be a signal which way they're leaning."