MNI INTERVIEW: Inflation Could Stifle 2025 Fed Cuts-George

The elevated risk of inflation from tariffs, bloated fiscal deficits and threats to central bank independence could make it hard for Federal Reserve officials to cut interest rates this year, especially if price pressures persist or even ratchet higher in coming months, former Kansas City Fed President Esther George told MNI. 

“The credibility of the central bank, its independence, has long been viewed, certainly for the United States, as being an important anchor. So when I look at inflation and inflation expectations, I do look at our fiscal situation right now and say, boy, that's an upside risk for the rate environment, for inflation,” George said in an interview. 

This could reduce the impetus for any reductions in borrowing costs this year at all even though as of June policymakers had penciled in two cuts. 

“If I were doing a personal forecast myself, that's the camp I would be in,” she said of the prospect of no cuts. “I just think it's going to take some time. I think we will see persistence in that inflation. And even if it doesn't pop up beyond where it is, it's going to keep the Fed on the edge of saying we can't turn loose of our 2% goal here very easily.” (See MNI INTERVIEW: Fed Should Stay Extra Cautious On Cuts-Sinclair) 

SKEPTICAL OF SEPTEMBER

George thinks Fed Chair Jerome Powell mostly tried to distance himself from the prospect of a rate cut at the central bank’s next meeting in September during his post-meeting press conference this week. The Fed held rates steady at 4.25-4.5% but two governors dissented for the first time since 1993 – Miki Bowman and Chris Waller. 

“I am a little skeptical of September. I thought he didn't lean toward September. He still leans toward rate cuts, for sure, but he was trying to say, let's wave off of thinking September as the big announcement, as opposed to there being a lot of things in play,” she said. 

George said it was premature to argue that the expected inflation related to tariffs will not materalize, in part because inflation numbers have stagnated for much of this year. She said the latest PCE figures, which showed a gain of 2.8% on core in the year to June, serve as a reminder that the Fed’s battle to bring inflation back to target is not over.

“I do expect it to come. When people are so relieved that they haven't seen it, I'm a little bit more cautious. People anticipated it, so they ramped up their inventories and we got a lot of imports. That has sort of faded now, but we are seeing it in goods, and I expect we will see it more over the next few months, because it just takes a while,” she said. 

“It's not like we're seeing the disinflation. So the real point is, the Fed is trying to hold the line on inflation.”

NOT RESTRICTIVE

Moreover, the backdrop of a resilient economy and persistent inflation might well mean policy is not very restrictive in the first place – perhaps not at all, said George. 

“For some time I have not thought this policy was restrictive. I think even to try to characterize it as mildly or modestly restrictive misses the point too. I heard the chairman say, 'well, we don't know what neutral is.' Right, and we all keep saying that. And yet there is a strong sense that we're trying to drive back towards something,” she said. 

"The committee has shifted its estimates of the long run R-star when it puts out its dot plot. There’s an acknowledgement that neutral has probably shifted up and, watching how the economy performed, I don't think interest rates are a drag on the economy.”