MNI INTERVIEW: Fed Will Cut In Dec, More Next Year-Reinhart

The Federal Reserve is likely to take out additional insurance against further labor market weakness by lowering interest rates again in December, and new leaders at the FOMC could cut borrowing costs more aggressively than the gradual easing likely to be depicted in the Summary of Economic Projections, former Fed Board division of monetary affairs chief Vincent Reinhart told MNI.

"The issue is if the run rate on hiring is 50,000 per month, you are flying the plane slower and lower to the ground and you are therefore more vulnerable to adverse shocks," he said in an interview. "There are some nonlinearities to the adverse shocks like businesses closing and people withdrawing from the labor market forever and are costly and could be recession-triggering."

"You are more nervous about that adverse shock," he said. A rate cut is "insurance and insurance is costly. After the fact, you shouldn't regret having bought insurance but you should recognize it was costly." 

UNCOMFORTABLE

Private data has shown a "low fire, low hire" labor market environment and "payrolls are probably growing at a rate that keeps the labor market in balance, but uncomfortably so," Reinhart said. (See: MNI INTERVIEW: Fed's Risk Management Cuts Not Enough - Revelio) 

"The baseline is 50,000 jobs a month, the unemployment rate staying around where it is, potentially up a tenth or so, and inflation at its current run rate," said Reinhart, expecting a long time for tariffs to show up in inflation measures. "The feed through of trade policies at consumer prices is really going to be stretched out, in part because it's taken a while for trade policy to get traction."

Reinhart said nothing has materially changed since the Fed put out its last SEP in September, which showed the median participant preferred three rate cuts this year, but by only one submission when compared to the group that preferred two or fewer rate cuts.

In October, the Fed eased interest rates at its second straight meeting. Chair Jerome Powell cautioned that another risk management reduction in December is far from a foregone conclusion.  (See: MNI INTERVIEW: More Fed Cuts Risk Inflation Spike-Weinberg)  

POLITICAL

The December SEP is likely to be complicated by the unknown political dynamics that lay on the horizon, he said, expecting the forecasts to show a little bit higher growth, gradual interest rate easing, and maybe a higher neutral rate.

The Fed's announced changes to its communications, which were supposed to come in the fall, also appears to have been punted, Reinhart suggested. "If you didn't do it in the framework review, when would you do it? And can can Chair Powell do it in advance of the successor? I don't think that looks right."

But Reinhart said his own forecast would differ from what he'd expect the Fed to show in the December SEP. "Our forecast is the world's changing. And that the focal point of that is, the new [Fed] chair."

"So, I think the SEP is not going to be necessarily predictive of what they do because it will be different people doing it. And so I think there'll be more cuts."

President Donald Trump has indicated he could nominate a replacement to Powell, whose term expires in May, before the end of the year.

NORMS

Central bank independence is a norm, said Reinhart, chief economist at BNY Investments. "If you had a politically inclined majority on the Fed's board of governors, you can influence what the FOMC does. And if its a social norm, tell me which social norm the administration hasn't tested thus far. Why would political independence be any different?"

Reinhart pointed to changes in norms across the landscape. "That's been true about trade policy. Has been true about defense policy, international relationships. Why not central bank independence?"