Jeff Lacker is convinced that after doing 100 basis points of rate cuts in the final months of 2024, the Federal Reserve is going to sit back for at least the first half of this year and wait to see what happens next.
As former President and director of research at the Federal Reserve Bank of Richmond, Jeff has spent many years communicating and interpreting the meaning of monetary policy decisions. Now he says the minutes of the Fed’s December meeting - where it showed officials divided on the need for more rate cuts after a series of reports showing a resilient economy - followed by a much stronger-than-expected December employment report, support his view that rate cuts are going to be paused for the next 6 to even 12 months.
Jobs report consistent with Fed transition away from rate cut course
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It was a stronger than expected jobs report, and we've had a string of stronger than expected real economic data since the middle of last year. And I think it …kind of puts a cap on the transition we've been in in the last couple of months, the fed sort of backing away from the (rate cut) course it set last summer.”
Jeff sees corroboration that the Fed is moving away from rate cuts now in the fact that the FOMC minutes showed a number of officials were ready to pass on the December rate cut if Powell had led them in that direction.
Dec. Minutes show Powell could have steered FOMC to no rate cut if he wanted to 00:02:00
It was apparent at the (December) meeting and in the press conference that it was a close call as whether to follow through on the expectation of a rate cut, a final rate cut in December for the year. The minutes that were released earlier this week make very clear that it was…a very close call, and if Powell had wanted to guide the committee to no…cut in December he could have had it and would have had support for that. The. And so this is further data today in the employment report that the economy is stronger than they thought last summer.
The Fed realizes that policy is not as restrictive as officials thought it was last summer Jeff says, and this will push the FOMC “to continue to rein in their expectations about rate cuts” and continue “the process of backing away from rate cuts.”
Lacker Sees No Rate Cuts in First Half of 2025, “Wouldn’t Be Surprised” to See No Cuts in Second Half
So I think they're they're in the process of backing away from rate cuts. I mean they they made a big dramatic step in December with the SEPs <Summary of Economic Projections> of pulling <two rate cuts out this year’s projections of four rate cuts> to make it two.
But I think they're going to back away from that further in the next couple of months, and I'd be very surprised if there are any rate cuts in the first half of the year, and you know, for the second half of the year it wouldn't surprise me for those to evaporate as well.
At the end of our interview, when I asked Jeff again to sum up exactly what he is betting on for the Fed this year, more rate cuts this year or none, he said, “They’re going to stand pat until September. And my guess is - about how the economy is going to evolve, how the data’s…going to come in, that they’re going to stand pat for the rest of the year as well.”
With a wry smile he added, “But I thought last year at this time they ought to stand pat for the whole year, 2024, and they didn’t do that, so now take my forecast with a grain of salt.”
We covered a lot more ground in this interview. Want to know why Jeff is worried about the big potential unrealized losses on the Fed’s balance sheet? Why the Fed shouldn’t “freak out” the next time it sees a couple of weak payrolls reports in an otherwise “solid” labor market? Why rising wages are one big progress reducing the core inflation rate has stalled out? Hear what he has to say about all of this and more.
Jeffrey M. Lacker
I am currently a Senior Affiliated Scholar at the Mercatus Center at George Mason University and a member of the Shadow Open Market Committee. and a Fellow of the Global Interdependence Center College of Central Bankers. I worked at the Federal Reserve Bank of Richmond from 1989 to 2017, where I was President from 2004 to 2017. From 2018 to 2022 I was Distinguished Professor in the Department of Economics at the Virginia Commonwealth University School of Business in Richmond, VA. From 1984 to 1989 I taught at the Krannert School of Management at Purdue University. Early in my career I worked at Wharton Econometric Forecasting Associates.
You can find my academic and Federal Reserve publications from before 2017 at this Richmond Fed web page. Speeches and testimony from that time on central bank policy issues (as opposed to the economic outlook) can be found here under the "At the Fed" tab. Post-2017 work can be found at the tabs for "Recent Appearances" and "Recent Writings". All the speeches I gave as Richmond Fed President are listed at this Richmond Fed web page. This IDEAS/RePEc page lists all my publications.
My biography on the Federal Reserve History web site is here, and the Wikipedia page about me is here. A bio is here.
I am currently associated with the following organizations:
Shadow Open Market Committee, Member
Mercatus Center at George Mason University, Senior Affiliated Scholar
Global Interdependence Center College of Central Bankers, Fellow
Richmond Jewish Foundation, Board of Directors
Council for Economic Education, Board of Directors
Virginia Council on Economic Education, Board of Directors
World Affairs Council of Greater Richmond, Board of Directors
University of Richmond, Trustee Emeritus
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