Dr. Vince Malanga, president of LaSalle Economics, criticizes the Federal Reserve’s claims of being non-political, pointing to recent actions that suggest otherwise.
He highlights:
- Federal Reserve actions in election season: Despite previously avoiding fiscal commentary, the Fed cut rates three times in late 2024 during the election period. It shifted its stance, citing political factors like Trump-era tax cuts, deregulation and tariffs.
- Potential chairmanship politics: Fed Governor Christopher Waller, a known hawk, has signaled more rate cuts in 2025, potentially positioning himself for the Chair role as the current term for Jerome Powell ends in May 2026.
- Inflation and energy prices: Malanga aligns with Waller’s view that inflation may resume its downtrend by spring 2025, driven by energy price weakness. However, he warns that weather disruptions and geopolitical factors could influence outcomes.
- Bond market and fiscal challenges: Long-term interest rates, Malanga argues, hinge less on monetary policy and more on expectations of unchecked deficits and debt. He suggests that fiscal reforms, like controlling government spending, are critical to stabilizing the bond market.
- Risks of fiscal drag: Malanga warns that while reforms may address excessive spending, they risk economic slowdown, especially given the affordability crisis in housing and construction. He urges the Fed to prioritize liquidity to counter potential fiscal drag but expresses concern that political distractions may delay necessary actions.
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