MNI INTERVIEW: Fed Will Be On Hold As Oil Shock Unwinds- Levy

The Federal Reserve is likely to keep interest rates on hold as the oil shock from the Middle East conflict unwinds and a temporary drop in prices raises the real fed funds rate, Mickey Levy, an outside advisor to several Fed Banks, told MNI.

"I doubt if the Fed would vote to raise rates in an environment in which the general price level is declining," said Levy, a member of the Shadow Open Market Committee, a group of private academic economists that acts as the Fed’s outside watchdogs. 

"The Fed's not going to raise rates when the when the CPI or PCE price index are declining," Levy said. Financial markets are pricing in only about a 30% chance ​of a rate hike at the central bank's July 28-29 meeting. (See: MNI INTERVIEW: Fed’s Next Rate Move Most Likely Upward-Kohn) 

Levy said this FOMC is on hold waiting for more data with the hope that core inflation recedes a bit, rather than having "its finger on the trigger to hike rates." 

UNWIND

The dramatic spike in oil prices generated three months of outsized increases in CPI and PCE inflation that pushed up their year-over-year measures. Oil prices have fallen sharply, and if current prices stick close to current levels, which is uncertain as inventories need rebuilding, continued rapid price declines in gasoline and other energy may result in months of decreases in the CPI and PCE price index.

"I think June's going to be the transition month in terms of the monthly inflation data, but in July and August you could have outright declines in the CPI and maybe the PCE," he said. "I can't remember when we've had such a period with oil where there's been a surge like we had on the way up and then a collapse on the downside. It's just striking."

This would ease some price pressures on consumers and let the Fed breathe more easily. The consumer in the last three months has been resilient, Levy said. "Consumption has been rising in real terms each month and you've got a nice bounce in employment." (See: MNI INTERVIEW: Fed Hike Plausible As Early As July - George) 

Levy, a visiting fellow at the Hoover Institution, also noted that retail gasoline prices have fallen rapidly and the labor market is at maximum employment. 

In its updated June Summary of Economic Projections, the FOMC members estimated that a rate hike may be appropriate to be consistent with its dual mandate goals. "But the FOMC member dots are not binding, and subject to changing conditions," Levy said. 

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