MNI INTERVIEW: Fed To Cut 50 In June On Growth Hit: Ex-Adviser

The Federal Reserve is likely to cut interest rates by a half point in June as evidence mounts the economy was already in recession before the trade war began, former Dallas Fed adviser Danielle DiMartino Booth told MNI.

The Fed is likely to keep rates steady at this week’s meeting even though it should already be reducing borrowing costs, she added. 

“They’ll commit a policy error in May by not lowering. Then they’ll have to come rushing in. I would anticipate a 50 basis point rate cut in June,” DiMartino Booth said in the latest episode of MNI’s FedSpeak Podcast. (See MNI INTERVIEW: A Few Fed Cuts Likely By Year-End - Bullard)

She believes ongoing downward revisions to last year’s payrolls numbers indicate the economy has been in a mild contraction for some time, which helps explain why consumers have remained so glum in surveys. 

WEAKER PAYROLLS EMERGING

“We do not have in the history of any of these surveys perceptions of the job market being as weak as they are without the U.S. being in recession,” said DiMartino Booth, founder and CEO of QI Research. 

April's job report showed an unexpectedly strong gain of 177,000 positions, but DiMartino Booth believes the monthly readings could turn negative as soon as May.

She also points to the Quarterly Census of Employment and Wages showing large downward revisions to payrolls – almost half the annual total – for the first half of last year. That trend will likely continue in June data running to the end of the fourth quarter of 2024, she said.

DiMartino Booth agrees with Fed Governor Chris Waller’s view tariffs will bring an up-front hit to economic activity that more than offsets any early inflationary effect. She also pointed to the Fed’s assessment of President Donald Trump's first term when officials concluded the drag on global trade was greater than the inflationary impulse from tariffs.

NO FAIRY TALE

Firms will have a harder time passing on higher prices to consumers who are scared of losing their jobs and potential pay cuts, DiMartino Booth said.

While 60% of businesses want to charge higher prices as their costs rise, some 38% have already discovered they are not able to do so, according to a Dallas Fed survey she cited. 

Underlying inflation pressures are already tame according to Fed Chair Jerome Powell’s own preferred metrics, DiMartino Booth said. Measures that substitute new tenant rents for owner’s equivalent rent already showed a rate of price growth below the Fed’s 2% target.  

“It’s no fairy tale that tariffs are causing input prices to rise. It’s just a question of who is going to absorb them,” she said.