To better understand the Fed’s latest move, CMLI sat down with Jeff Fuhrer, former EVP and Director of Research for the Federal Reserve Bank of Boston and currently a Non-Resident Fellow at the Brookings Institution. He shared his take on why the odds of the Federal Reserve raising interest rates are “very remote”.
CMLI: Was the Fed’s move unexpected?
Fuhrer: The Fed’s decision to keep interest rates unchanged was not a surprise. But messaging around the decision—including the Chair’s press conference—made it clear that earlier expectations for multiple rate cuts this year are much less likely to be realized. Those revised expectations are likely fully priced into Treasury and other fixed-income prices.
CMLI: What is the bigger message?
Fuhrer: I think it’s important not to get over-excited about the news. The Fed has to say that it is on the inflation case. For three months, CPI and PCE inflation measure have been roughly flat, contrary to expectations. Why? I believe (and Chair Powell suggested the same in his conference) that the sticking point is in prices of services, especially housing services. As most of us know, the rate of inflation in the services delivered by owner-occupied housing is an estimate based on changes in market rents for rental dwellings. We know that virtually all measures of market rents have flattened over the past year or more.
However, that flattening has not yet shown up in the BLS’s estimates of owners’ equivalent rent. There is quite normally a lag between observed market rents and CPI measures that incorporate them. This time, the lag is a bit longer. But it would be very peculiar if this significant trend in market rents didn’t show up in measured inflation. It almost surely will, and when it does, inflation will continue its gradual decline.
CMLI: What’s the Fed’s take on Inflation?
Fuhrer: The Fed knows all this, but its job is to ensure the public that it takes its job of reducing inflation seriously. That means waiting for more compelling evidence that service and overall inflation will indeed resume its decline. When it does (not that we know this with metaphysical certainty!), they will very likely first announce and then begin their plan to lower rates.
To its credit, the Fed is clear that the likelihood of raising rates is very remote. The labor market remains strong (there are a few very minor signs of weakening in the latest report, but I think a better read of that report is that it’s settling into a sustainable pace of growth rather than something that can’t be sustained indefinitely). The Fed is quite happy with that outcome. As I wrote in my recent book, their views on this changed somewhat in the wake of their “Fed Listens” tours from 2019-present, during which they engaged community members in discussing the impact of monetary policy on lower-income folks, communities of color, retirees and so on.
A bumper-sticker takeaway that they heard during that tour was something to the effect of: “You guys talk about recessions that come and go. In our communities, we’re always in recession.” The practical import of that takeaway is that once inflation drops to an acceptable level—which I believe and hope will be soon—the Fed will make the extension of the economic expansion job one, because they know that the brunt of slowdowns and recessions falls disproportionately on those who can least afford reductions in hours or unemployment. That’s a highly welcome change in the Fed’s interpretation of its dual-mandate mission.
CMLI: What’s the Fed’s target?
Fuhrer: My sense of the risks today is that while there is a small risk that inflation will remain above the Fed’s 2% target, there is a larger (but not looming) risk that rate increases to date will take an increasing toll on spending and employment. That risk can be reduced if rates are reduced as appropriate given inflation outcomes.
