MNI INTERVIEW:Low Inflation Ex-Tariffs Backs Fed Cuts-Haslag

Federal Reserve officials have room to reduce interest rates starting next month because inflation is already at or below target if not for the one-time tariff shock, but borrowing costs are just two or three quarter point cuts away from neutral so any further easing will be cautious, former Dallas Fed economist Joseph Haslag told MNI. 

“It'll be interesting to see September. I can't imagine it would be anything other than 25 basis points, but I could imagine a 50, and that would still leave us in a position where we're probably a little smidgen tight in terms of the stance of monetary policy,” said Haslag in an interview. 

After that, he sees a “50-50 chance that we have another 25 basis point cut before 2025 ends.”

Haslag, also a former Kansas City Fed visiting scholar, thinks the Fed is well-advised to begin cutting in September even though he thinks key inflation measures will hover between 2.5%-3.5% in coming months. 

That’s because he believes underlying inflation is moderating and that the hit from tariffs will be fleeting, an argument also made by Fed Governor Chris Waller after dissenting in favor of a July cut. 

“If it weren’t for the whole tariff business, I think we'd already be in the 2% or maybe even a little bit below stage. I think what we're seeing now is the slow trickle of the pass through of tariffs,” he said. (See: MNI POLICY: Fed Takes Measured Approach To Post-September Cuts)

LACKLUSTER GROWTH

Seeing little catalyst for a short-term burst of renewed economic expansion, Haslag expects GDP growth to hover near the soft first half clip of 1.5%, perhaps a bit weaker, for the remainder of the year. 

“I don't think we're going to be at 5% unemployment before the end of the year, but I think we're going to move up from 4.2% and it's going to be edging up over the next six to nine months,” he said. 

Fed Chair Jerome Powell appeared to put a September rate cut on the table in last week’s Jackson Hole speech, and his case was based importantly on perceived downside risks to the labor market after major revisions to recent data. 

Haslag said he’s concerned about the quality of economic data based on the scale of recent revisions. 

"Data quality is pretty questionable,” he said. “Maybe the BLS is a little bit behind by doing phone surveys the way they do. It’s fair to say that it's time to ask is there a better method? Because this one doesn't seem to be working all that well."