Is the Fed really opening the door to rate cuts later this year?

I continue to be annoyed by so-called professionals who apparently sincerely believe that the Fed will cut interest rates as soon as inflation moderates. Such a suggestion is ridiculous since the Fed has made it clear that current rates are neutral. That means that cutting rates would lead to an accommodative or stimulative monetary policy, which is precisely the last thing the Fed would want to do to keep a lid on inflation.

This week a see a subtle variation on the "Fed will cut rates" theme from a journalist whose Fed credentials are beyond reproach, but with a twist that makes more sense.

John Berry used to report on the Fed for the Washington Post, but now writes a Fed-related column for Bloomberg. In his latest column provocatively entitled "Fed Rate Cut Possible If Inflation Keeps Easing" he writes:

The Federal Reserve's forecast that core inflation would begin to decline this year appears to be falling into place.

If the better numbers continue, it might open the door to interest rate cuts later in the year should economic growth fail to rebound as Fed officials expect.

[My emphasis] 

So, he does use the provocative language that lower inflation "might open the door to interest rate cuts later in the year ", but clearly adds the double caveat "should economic growth fail to rebound as Fed officials expect." So, yes, he says that lower inflation could lead to Fed rate cuts, but only under the condition that growth fails to rebound and he reminds us that this is not the economic forecast that the Fed is operating under.

I am moderately annoyed that John's headline is seeming to cater to the bears and cynics and a false view of the criteria for a rate cut, but I am at least relieved that he has succinctly stated the conditions that would be needed and the fact that those conditions are contrary to what the Fed has publicly stated as its outlook.

To further emphasise the nature of the economic outlook, John writes:

Is growth likely to slow? More than a few forecasters, including those at Macroeconomic Advisers -- whose work many Fed officials follow closely -- expect growth at an annual rate of 2.5 percent to 3 percent in the second half of the year.

Some may regard 2.5% growth as too low and worthy of a rate cut, but there simply is no evidence that the Fed thinks that way.

Regardless of what you think of the Fed's own economic outlook, we have the outlook of the independent Macroeconomic Advisers to depend on. To be brutally honest, you should be skeptical of anybody who thinks they are that much better at forecasting than Macroeconomic Advisers.

So, as far as those rate cuts as soon as inflation moderates: dream on.

-- Jack Krupansky