MNI INTERVIEW: Fed Should Show Resolve, Wait To Cut - English

The Federal Reserve should ensure that inflation expectations remain well anchored before easing interest rates, possibly in the second half of the year, particularly as memories of the Covid inflation shock remain fresh, former director of the Fed Board's division of monetary affairs William English told MNI.

"The Fed may need to show some resolve and keep rates tighter for longer to avoid having that higher inflation getting built in wage- and price-setting and becoming a more persistent problem," he said in an interview, in which he anticipated a level of easing below the three 25-basis-point rate cuts currently priced by futures markets. 

While English is not expecting "several" 25bp rate cuts this year, the Fed “could well ease a couple of times in the second half of the year" as the economy slows and inflation expectations remain contained, he said, "if the tariffs end up being something like what we expect, and the effects are along the lines that the Fed has suggested.”

"Given all of that uncertainty, I don't think the Fed can do anything at this point other than say, 'We're going to wait and see. We're going to be nimble if the economy starts to really slow sharply, but for now, we're going to wait and see,'" he said. (See MNI INTERVIEW: Fed On Hold Until Tariff Pause Passes- Lockhart)

STATEMENT 

The FOMC this week is likely to keep any edits to its post-meeting statement minimal, said English, a former secretary to the FOMC and now professor of the practice at the Yale School of Management.

"If I were still sitting where I sat once, I think I would say, 'Let's just leave the statement. It's a perfectly good statement.' It gives them a lot of flexibility. They can respond if they need to," he said. "I'd just leave it."

English pointed to uncertainty not only over the policies which are ultimately going to be pursued by the Trump administration, but also over the effect of those policies, and over their impact on inflation expectations and on whether these will remain well-anchored.

The potential sensitivity of inflation expectations marks a difference with the trade war with China during Donald Trump's first term, which saw the Fed lower interest rates three times in 2019.

"What seemed likely back in 2018-2019 after a decade of really low inflation is well-anchored inflation expectations would serve as a magnet and pull actual inflation down towards the target in the outlook," English said.

"Now we have a recent kind of inflation scare in 2021 to 2023. People are tuned to inflation, and they may react more strongly if they see another rise in inflation that lasts a while.”

The Fed’s March Summary of Economic Projections, which showed the median participant expecting two rate cuts, remains a good guidepost, he said.

"After early April, they probably would now expect more tariffs than they did at the time of the March meeting, and that would push inflation up a bit more and push output down a bit more,” said English. "But the higher inflation and weaker employment have offsetting effects on desired policy."

INDEPENDENCE

A longer wait before easing policy risks further tensions with President Donald Trump, who has consistently criticized both the Fed and Chair Jay Powell for not preemptively lowering the policy rate. Trump on Sunday said he would not replace the chair before his term ends in May 2026. 

"The question is, what can the Fed do about this? And I think the answer is nothing," English said. "While the challenges for Fed independence are bigger now than they've been in a long time, the Fed is reasonably well protected by the Federal Reserve Act and the structure of the FOMC." (See MNI INTERVIEW: Fed Independence Facing Imminent Risk - Menand)