MNI INTERVIEW: Fed To Cut Faster After Weaker Jobs - English

The August U.S. jobs report is likely to amplify the Federal Reserve's concerns about a cooling labor market, prompting the central bank to cut interest rates as many as three times this year, former director of the Fed Board's division of monetary affairs William English told MNI.

"There's no doubt the labor market report was soft, and that causes them to lean in the direction of easier policy," he said in an interview Friday. "It leans in the direction of easing policy further, faster than maybe the Fed had been inclined to." 

The latest Bureau of Labor Statistics report confirmed a labor market that's cooling, with revisions showing the economy had lost jobs in June for the first time in nearly four years. The jobless rate rose to 4.3%, the highest since 2021. 

FASTER

"The economy is slow and it's time to to cut rates some if what you're trying to do is balance the risks to the inflation outlook and to the employment outlook," said English, now at Yale University. "The risk to the employment outlook look bigger now." (See: MNI POLICY: Fed Takes Measured Approach To Post-September Cuts) 

A 50 bp cut in September may be considered but looks unlikely at the moment. However, next week's CPI report and labor data revisions will factor importantly, he said. "I could imagine they could get there, but it's not what I expect at this point." 

English suggested the FOMC's June forecasts remain a decent guide for how policymakers likely see the economy, with a weaker labor market and higher inflation. In June, the median official saw two 25 basis point cuts this year. The median policymaker also saw weaker GDP growth of 1.4% this year, unemployment rising to 4.5%, and core PCE reaching 3.1%. 

"My best guess at this point is still they are something like where they were in June, but with the labor market having softened a bit more, they may well end up with three cuts rather than two this year," English said.

INDEPENDENCE

The Federal Reserve's monetary policymaking freedom from political interference is at serious risk, English warned. "The last time there seemed to be this sort of really, really strong pushing and shoving was maybe back around the time of the Treasury-Fed Accord." (See: MNI INTERVIEW: Trump Missed Window For Significant Fed Change) 

Stephen Miran, Trump’s pick for the Fed board and the White House Council of Economic Advisors Chair, said this week he plans to keep his White House job while at the Fed. 

"There's no question that it weakens the independence of the institution to have people on the Fed Board who are also in senior positions in the administration," English said. "The Congress got rid of that back in 1935 when they set up the modern Fed, and the Secretary of the Treasury and the Controller of the Currency were moved off the board."

"I do worry that the Fed's independence could be really undermined, and I think we know that that would be a bad thing. There's a lot of evidence that independent central banks deliver lower inflation on average and just better economic outcomes on average."