MNI INTERVIEW: Fed To Cut Twice In 2025 On Weak Growth-Haslag

Federal Reserve officials are likely to lower interest rates twice this year as the economy slows gradually and feared tariff inflation fails to materialize in coming months, former Dallas Fed economist Joseph Haslag told MNI. 

“I think the justification for the real doves is going to be, look, the economy is really slowing, we're not going to get 2-3% growth range,  we're going to be at best 1-2% range, and maybe even a little bit softer than that,” Haslag said in an interview. 

“Those guys are going to be ready to pull the trigger. And as long as the tariff stuff stays off the table, and there's no clear path for short-term price pass throughs of underlying policy or supply forces, I think the Fed is going to say, we've been tight for a long enough time, and our sense is the underlying inflationary forces after we get rid of the fear of pass throughs is probably less than 2% now.”

This week, Fed governors Chris Waller and Miki Bowman said they could countenance a July cut if the data cooperate, while other policymakers including Chair Jerome Powell have been more circumspect, sticking to a wait-and-see message. 

Haslag, who thinks the current 4.25-4.5% rate level is still significantly restrictive, believes that by fall, perhaps around September, there will be a greater consensus around the idea that monetary policy needs to be loosened further.

“It could be September. If it’s October – it will be one of the two, barring any surprises,” he said. (See MNI INTERVIEW: Fed Will Face 'Tough Calls' In H2-Holtz-Eakin)

NEUTRAL LEVEL 

Haslag, a University of Missouri professor who was also a visiting scholar at the Kansas City Fed, agreed with Powell’s assessment at this week’s testimony that the neutral of level of rates would probably require two more quarter-point cuts. 

“If you cut it 50 basis points, then I think we were comfortably in the neutral range in terms of stance,” Haslag said. 

“My favorite indicator, something like IOR minus the one- or two-year Treasury rates, indicates the current state of policy is still fairly tight and keeping inflation down.”

More broadly, Haslag believes investors and firms have gotten over the early fears about the Trump administration’s more extreme negotiating positions, and become convinced that it will eventually be talked down into a more reasonable policy mix. 

“They have learned how to process the blustery nature of President Trump's rhetoric, and they see through it, and the tariff stuff, I think they see it now is this is a businessman who is trying to bluster his way through a negotiation process, and it's not going to be as bad as he says,” he said. “That relieves the need to pass through whatever the small tariffs are.”

JOBS WEAKNESS

Haslag said a gradual weakening of the labor market, including persistent downward revisions and softer readings on monthly increases to payrolls, is offering some early hints that all is not well in the economy. (See MNI INTERVIEW: Hiring Slows But Not Enough For Fed Cuts)

“What we’ve got is weak growth and inflation that is susceptible to some short-term forces. So I don’t think the underlying inflation prospect looks too much different from being between 2 and 2.5%,” he said. 

The former Fed staffer is also optimistic about a possible productivity boom that will help tame any inflationary bursts from the trade frictions. 

“I think that the forces that are acting on the market basket of goods and services now are twofold: the tariffs are one side, but I still think that the nascent benefits, the productivity gains of AI are on the other side.”