MNI INTERVIEW: Fed Should Stay Extra Cautious On Cuts-Sinclair

The Federal Reserve should refrain from lowering interest rates until inflation returns to its 2% goal or the job market unexpectedly weakens, especially because threats to independence are likely to boost inflation expectations, former senior Treasury official Tara Sinclair told MNI. 

Sinclair said that while there might be a textbook case for the Fed to look through possible inflationary pressures from U.S. tariffs on its trading partners, the Fed is in a tight spot because Americans are still not convinced inflation has been vanquished. 

“That might be true if the Fed weren’t still trying to really regain its credibility about its 2% target. I think right now, the Fed is still fighting that last war of bringing inflation all the way back down to their target, and that matters for inflation expectations,” she said in the latest episode of The FedSpeak Podcast. 

“Particularly when you combine this with threats to the Fed’s independence, I think the Fed needs to be extra vigilant and extra conservative in terms of when they might lower rates,” added Sinclair, who served as deputy assistant secretary for macroeconomics in the Office of Economic Policy at Treasury between 2022 and 2024 and is now chair of The George Washington University's Economics Department. (See MNI INTERVIEW: Fiscal Dominance To Fan US Inflation-Leeper)

This backdrop requires Fed officials to maintain a hawkish message on their desire to crush inflation, she said. 

TOUGH ON RATES 

Sinclair, a former visiting scholar at the St. Louis and Atlanta Feds, said that if she were a policymaker “I’d say I’m looking at inflation expectations and they need to see me being tough on rates right now. Tough on rates just means not lowering quite yet, that still leaves a lot of room for addressing any weakness that comes into the labor market going forward. We definitely don’t want to preempt those concerns until we really see inflation either clearly hitting the target or more weakness than we’ve seen in the labor market so far.”

Simulations by one of her co-authors indicate that political pressure to lower rates can permanently raise inflation.  

“This isn’t just a one-time price level shift – it’s a permanently higher level of inflation which means prices are growing faster and faster over time,” she said.  

“It’s definitely a deep concern that these pressures may exactly backfire, and that by trying to get rates low, we’ll see higher debt costs instead of lower debt costs.” 

FRAMEWORK REVIEW

Sinclair, a co-author on a recent paper looking across central bank reviews undertaken by major institutions around the world, said she is worried the Fed’s current framework revisions could fall short of its potential because it is only considering a restricted range of factors. 

“I do think the Fed’s review is remarkably narrow. A lot of these reviews from other central banks come out with hundreds of pages of recommendations and the Fed is expected to come out with a revised version of a one-page document,” she said. 

The lack of an external portion to the review, which Sinclair’s research finds is more common among the larger central banks, is a “missed opportunity,” she said. 

“Everybody is going to write a paper about what the Fed should do in its review. But the Fed doesn’t have to respond to any of them. We’re not getting that sort of two-way dialogue."

Because policymakers have telegraphed their areas of focus in the Statement of Long-Run Goals, the more interesting part of the review could be any changes to the SEP. But Sinclair doesn’t expect anything too radical there either: “I have the sense it might be quite narrow, and it might just be about revisions to how they report the Summary of Economic Projections."