Fed Forecasts: Rate Cuts Ahead Or None At All?

As the Fed begins its two-day meeting, analysts are still in disagreement over what the central bank’s next moves will be as the year goes on. Jason Schenker from Wachovia and Carl Tannenbaum from LaSalle Bank disagree on what the Fed considers to be at risk when they make their decisions. They were on “Morning Call” to give their Fed forecasts.

Schenker says the Fed is on track for a rate cut in the second quarter. His reasoning? GDP numbers have been showing below trend growth for 3 of the last 4 quarters – and he expects to see the same thing into this year. Schenker isn’t expecting a cycle of cuts, but a cut of 25 basis points in June to give the economy a lift. Tightness in the labor market is also putting pressure on core inflation, he says, which is evidence a cut is coming.

But Tannenbaum seems no sign of a rate cut. He says the GDP numbers are below trend – yes – but “just barely” and not enough to be signal risk for inflation. He says the labor market is not releasing much unused capacity and there is productivity growth is good as well. But he does say if productivity tapers off to a more normal, historic level, then the labor market will become a bigger inflation risk. Until that actually happens, he sees the Fed remaining conservative at least for the first part of the year.

The labor market is crucial when trying to predict the Fed, Tannenbaum says, because labor costs are thee one area that the Fed’s management of credit can truly affect. It isn’t like commodity prices, which are volatile and generally unmanageable. Schenker agrees about the importance of the labor market, and he thinks that’s why the Fed has a rate cut in mind for June.