MNI INTERVIEW: Fed Should Hold, Focus On Inflation - Emmons

The Federal Reserve should hold rates steady at its next meeting in mid-September despite signs of a softer economy, with inflation yet to reach the 2% target, former St. Louis Fed economist William Emmons told MNI, adding that a cut was probable anyway.

Any September cut would likely be framed in cautious terms, with a meeting-by-meeting approach and no commitment to additional reductions, Emmons said, adding that this would nonetheless feed speculation of further easing.

"Don't make a move until you're ready to commit to a series of moves. And that's the way the Fed has operated in the past," he said. "If they cut in September, they've committed to further cuts."

"Being 'well-positioned' in this case probably means doing nothing, because the Fed is famously reluctant to reverse direction. If they were to cut in September, which seems likely, the likelihood that they would then reverse and go back up seems very slight."

INFLATION RISING

July CPI data were a mixed bag, but the 0.32% monthly increase in core CPI was strong, and growth in core service prices accelerated to an annualized 4.5% in July, the worst in six months. (See: MNI INTERVIEW: Fed September Cut Not Assured - Rosengren) 

"It's kind of a mystery to me why people now are still talking about all these interest rate cuts from the Fed when the evidence is very clear that inflation is rising," Emmons said. "The confidence that this is transitory or a one-time effect of the tariff shock is a gamble, because people are so sensitized to inflation.”

The economy is a little softer but, of the Fed’s dual mandate goals, inflation appears to be the metric that is on track to be further from target for longer, he said, noting that the Fed's own projection is for it to rise this year.

"If they were truly data dependent, there would be very little case for a cut, let alone making three cuts in succession right now. The data are not that dire, even with the jobs data revisions,” he said.

"The idea that some people have of dismissing the inflation side of the mandate right now seems pretty dangerous to me. Looks to me like the disinflation has ended and it never got back down to the 2% level. That's a failure, and the fact that the inflation expectations process has been unanchored."

NEUTRAL RATE

A resilient economy and persistent inflation might mean policy is not very restrictive, said Emmons, who spent nearly three decades at the St. Louis Fed. (See: MNI INTERVIEW: Inflation Could Stifle 2025 Fed Cuts-George) 

Emmons pointed to 10-year Treasury forward rates. "This market-based measure is saying, 'Oh, things have changed again. The neutral level is probably closer to 4.5 to 5%.’"

"If this is true, that the neutral level has actually moved up substantially from the Covid lows, then the Fed is mischaracterizing monetary policy. It's not restrictive at all. If anything it's neutral, maybe even a little bit accommodative," he said. "If they now cut they're going to be moving further into accommodative territory."