MNI INTERVIEW: Fed To Keep Cutting On Jobs Weakness - Tilley

A weak labor market and improving inflation will prompt the Federal Reserve to keep cutting interest rates at its next few meetings, former Philadephia Fed officer and economic adviser Luke Tilley told MNI. 

Tilley said the nomination of Kevin Warsh to take over as Fed chair from Jerome Powell when his term ends in May was a victory for central bank independence, but will not drastically alter the course of monetary policy.

“We don't have inflation pressure, I think the labor market is going to get worse, so we’ve got three cuts before the middle of the year – two of them I guess would be with Powell,” Tilley said in an interview Monday.  (See MNI INTERVIEW: Fed's Miran Sees Substantial Rate Cuts This Year) 

Warsh would be inclined to continue easing but only if economic data call for it, not because he is somehow beholden to President Donald Trump, Tilley said. 

“The president has chosen an independent thinker. Of the candidates that were being considered it's one of the better ones in terms of markets and to preserve Fed independence," said Tilley, now chief economist at Wilmington Trust. "I don't think that he's going to come in and push for lower rates because of the administration. He could do it because he believes that the way things should go.”

INSTITUTIONAL CONSTRAINS

Tilley said it remains unclear how much Warsh will be able to overhaul the policy framework on everything from economic modeling and rates policy to the balance sheet given institutional constraints within the Fed.  

“It opens up the question of, are we going to get wholesale changes to the way the policy is being done?  It's a lot easier to think and speak outside the box when you are outside of the box. When, when you get there, it's much harder to push and implement that change,” Tilley said. (See MNI POLICY: Regional Fed Banks Could Face Revamp Under Warsh)

“It is a committee and there's a very large, entrenched research staff, I think it’s lost on the public sometimes how much influence the staff has in terms of guiding policy and the discussion. So I think there could be some larger changes to how policy is carried out over the course of years, but I don't see it being a whiplash moment of, ‘oh my goodness, we have this new chair, and everything is going to change right away.’”

That will be true even for balance sheet policy, of which Warsh is a long-time skeptic and critic. “I think that is a tough, uphill climb to make immediate changes to the way that the balance sheet is run,” Tilley said.

Warsh has also expressed skepticism about things like forward guidance and the Summary of Economic Projections, which Tilley said could be candidates for medium-term reform. 

“I wouldn't be surprised if there is a long-Term review into the Fed’s monetary policy and you end up getting less communication at some point then you have now,” he said, adding this would not come without its own dangers. “If you're going to pull back on communication, you know you could have more market volatility.”