Federal Reserve officials opted to hold interest rates steady at their March FOMC meeting on Wednesday, while still anticipating to cut rates twice in 2025.
Former Federal Reserve Bank of Kansas City Former President and CEO Esther George joins Market Domination host Julie Hyman to talk more about how the US central bank is factoring economic growth uncertainties — especially those tied to tariffs and inflation — while reviewing the Fed's Summary of Economic Projections (SEP) report.
To watch more expert insights and analysis on the latest market action, check out more Market Domination here.
I want to dive right into it and ask about um, your experience with the Fed's assessment of hard data versus soft data because that really seems to be what has sparked market concerns here is the talk about tariffs and the effect it has had on things like consumer confidence. How is the Fed weighing that versus the hard data which hasn't deteriorated as much?
Yeah, it's a great question because I think as we look at the statement, the Fed's statement really lays that out for us today, which is a characterization of the economy that looks very similar to their previous statement, which means the hard data coming in confirms that assessment. When you look at the next paragraph though that introduces the idea about elevated uncertainty, I think that gets to some of these survey measures and some of the soft data that is beginning to flash perhaps some warning lights, uh, to get to give the Fed pause and to say we need to be watching some of these conditions as they unfold. So they're very important at the end of the day in terms of trying to gauge your longer run forecast.
And so as they are trying to sort of tip the scales to being more concerned about inflation or more concerned about growth, what do you think is going to be um, sort of the most important determining factors when it comes to that? How are they going to decide when do they need to decide as well?
So remember the Fed has been worried for some time about inflation. They have focused on this as a reason for why their rate path has been recalibrated if you will. And a reminder that their most direct objective is to bring that inflation back to target. And right now they're telling you as you look at the dot plot, as you look at their statement that inflation is elevated and they have to keep that in front of them. The degree to which the economy slows of course will matter too, but an economy growing at 1.7 while inflation is high might not really push their hand on their rate decision. Now, if the economy slows more quickly, if you begin to see employment, uh, begin to suffer, then that's a different matter. So I think it's a matter of degree on the growth side, and on the inflation side, again, a primary area of focus for them as it must be.
So, uh, we were, of course, also looking at the summary of economic projections, the so-called dot plot, and they're seeing two, um, Fed cuts, two interest rate cuts still priced in here, but a large dispersion within the dots of those forecasts, um, perhaps reflective of the difficulty of the task right now. Um, in your experience at the Fed, how unusual is that sort of dispersion and talk to us about the then consensus building exercise of getting on the same page?
Yeah, so to start with, remember the dot plot is, you know, 19 individuals laying out what they see happening over the coming year and looking out again to the next two years. Right now, what happens in the coming year is really the key focus. And what this dispersion is telling you is the level of uncertainty is higher. This often happens during times of transition in the economy one way or the other, that you will get views to begin to diverge around what that means in the next 12 months. And you see that, I think, in this current SEP. The process of bringing consensus around that, though, as you see in the vote today, is that they are able to coalesce around what does it mean for this meeting, not a promise about what happens the next meeting and the rest of the year, but to say for today, they are satisfied that they will watch the data to see if it confirms the forecast that they put out for 2025. And so I think that's the message from this, consensus always there in terms of trying to decide when the right timing is. Um, and I think for now wait and see continues to be their mantra.
Um, so nine policy makers now saying there are going to be two cuts, but eight now see one or no cuts. Esther, what's your best guess at what happens and how many cuts we get this year?
Well, I think putting two in that forecast is a reasonable number. Again, depending on how the economy unfolds, of course. If this weakness turns out to be temporary, if there is some clarity that comes about, if there is some adjustment to some of the things that are currently worrying both consumers and businesses, then you might see the path ahead allowing inflation to shift gears and continue its downward trend. But I think if inflation proves stubborn as it has been the last few months, you will see them hold on longer. And remember they have to carefully be watching inflation expectations. We've seen some survey measures beginning to show those rising, and that is not what the Fed wants to see as they try to, again, calibrate the economy without, you know, causing more damage than they need to.
Right. Esther, thank you so much for your time. Appreciate it.
