MNI INTERVIEW: Fed Will Be On Hold As Oil Shock Unwinds- Levy

The Federal Reserve is likely to keep interest rates on hold as the oil shock from the Middle East conflict unwinds and a temporary drop in prices raises the real fed funds rate, Mickey Levy, an outside advisor to several Fed Banks, told MNI.

"I doubt if the Fed would vote to raise rates in an environment in which the general price level is declining," said Levy, a member of the Shadow Open Market Committee, a group of private academic economists that acts as the Fed’s outside watchdogs. 

"The Fed's not going to raise rates when the when the CPI or PCE price index are declining," Levy said. Financial markets are pricing in only about a 30% chance ​of a rate hike at the central bank's July 28-29 meeting. (See: MNI INTERVIEW: Fed’s Next Rate Move Most Likely Upward-Kohn) 

Levy said this FOMC is on hold waiting for more data with the hope that core inflation recedes a bit, rather than having "its finger on the trigger to hike rates." 

UNWIND

The dramatic spike in oil prices generated three months of outsized increases in CPI and PCE inflation that pushed up their year-over-year measures. Oil prices have fallen sharply, and if current prices stick close to current levels, which is uncertain as inventories need rebuilding, continued rapid price declines in gasoline and other energy may result in months of decreases in the CPI and PCE price index.

"I think June's going to be the transition month in terms of the monthly inflation data, but in July and August you could have outright declines in the CPI and maybe the PCE," he said. "I can't remember when we've had such a period with oil where there's been a surge like we had on the way up and then a collapse on the downside. It's just striking."

This would ease some price pressures on consumers and let the Fed breathe more easily. The consumer in the last three months has been resilient, Levy said. "Consumption has been rising in real terms each month and you've got a nice bounce in employment." (See: MNI INTERVIEW: Fed Hike Plausible As Early As July - George) 

Levy, a visiting fellow at the Hoover Institution, also noted that retail gasoline prices have fallen rapidly and the labor market is at maximum employment. 

In its updated June Summary of Economic Projections, the FOMC members estimated that a rate hike may be appropriate to be consistent with its dual mandate goals. "But the FOMC member dots are not binding, and subject to changing conditions," Levy said. 

DELIBERATE

MNI INTERVIEW: ECB 'May Have To Do A Little Bit More' - Wunsch

A lasting ceasefire in the Persian Gulf pushing oil and gas prices lower may shield the eurozone from significant second-round inflation effects, but some impact is inevitable and the European Central Bank may have to hike again, Belgian National Bank Governor Pierre Wunsch told MNI.

"We may have the shock disappearing before materialisation of any significant second round effects, but we are going to have some, so maybe we have to do a little bit more," Wunsch said in an interview at the ECB Forum in Sintra.

Speaking ahead of the publication on Wednesday of preliminary June data showing a decline in euro area annual inflation to 2.8%, Wunsch said "the July [inflation] number is probably going to be good on the low side, a downside surprise, and you don't want to hike on a downside surprise."

"But in September we're going to have a new projection, and some more visibility on the second-round effects," he noted. (See MNI INTERVIEW: September Hike Not Guaranteed - ECB's Demarco)

DON'T HESITATE

If the ECB needs to hike, it should not hesitate to act when the time comes, Wunsch said.

The question now is, and this is where I might differ a little bit from my colleagues, is if we need -- and I'm not saying that we need one -- but if we need another hike, I wouldn't wait too long," he said.

"I'm not pleading for a hike, I'm just saying if, if we see enough second-round effects that we believe we should be doing more, then don't wait too long,” Wunsch said. “We know inflation is going to be above target for a while. If we feel we need another hike, if the data tells us and data analysis and models say that we need the second hike, I would not hesitate too much." (See MNI INTERVIEW: ECB Ready To Hike Or Change Course - Kocher)

ROBUST MOVE

Wunsch did not think the ECB's June hike could possibly come to be seen as a serious policy mistake whatever the inflation outcome, but as a robust move, consistent with the data.

"We have to accept that we live in an uncertain world, and that we're going to take decisions sometimes not knowing what's going to happen the next day. But I think inflation is going to be above 2% for a while, so if you tell me that was a mistake ...." he said.

"We don't know when we are going to be at an inflection point, so that's when you can make a small mistake, but it would only be a small mistake. Real rates are going down, so I don't think there is any argument saying it was a mistake."

GUIDANCE

Referring to President Christine Lagarde's speech indicating that the ECB was moving away from “complex” forward guidance, Wunsch agreed that the Governing Council's ongoing data-dependent, meeting-by-meeting approach was correct.

However, he added that at times there would be room for guidance of some sort.

"We are not going to copy and paste meeting-by-meeting, data dependent for the next five years. At some point, it won't mean anything. Sometimes we can allow ourselves to give some kind of guidance, for example, I said in March ‘I guess if this conflict is not done by June, we're going to have to hike,’” he said. "I would not exclude that you need to give a signal, it might be a conditional one, a very cautious one, like if this unfolds, then we might have to do this.”

MNI INTERVIEW: September Hike Not Guaranteed - ECB's Demarco

The bigger-than-expected drop in energy prices and encouraging data including a fall in core inflation mean there is no reason for the European Central Bank to rush into any further interest rate increase, Bank of Malta Governor Alexander Demarco told MNI, adding that a hike in September is not guaranteed.

“If both the data which is coming out and the new projections in September continue to show that the baseline or milder scenario still holds, we could have a reason to hike again. But if the actual data shows that things are better than what we expected of indirect effects on inflation, maybe there is no need for another rate hike in the end,” he said in an interview on the sidelines of the ECB Forum in Sintra.

“I think time is a bit in our side in the absence of any dramatic developments,” he added, though he noted that even the ECB’s milder scenario, which now seems to be materialising, implied another rate hike.

“The question is now the timing, because I think, given that oil prices have gone down so much, we have to see what the data will tell us.”

Oil prices are now lower than the projections in the milder scenario, though futures prices are still between the mild and baseline scenarios, said Demarco, adding that while cheaper energy could have positive implications for short-term inflation expectations, the U.S.-Iran ceasefire is fragile and uncertainty persists. (See MNI INTERVIEW: ECB Ready To Hike Or Change Course - Kocher)

MILDER SCENARIO DISCUSSION

Demarco admitted that he had initially shared reservations with some other Governing Council members regarding the inclusion of the mild scenario in the ECB’s June projections.
“I thought, at that time … the milder scenario was not very likely to happen,” he said, noting that prospects for rapid agreement between the U.S. and Iran had appeared remote during the June meeting. However, he added, “I saw the rationale also for including the milder scenario because … even though it may have seemed less probable to occur … it would confirm the need for the rate hike in June … So from that perspective, I  went along with the decision and I think it was a good decision to include the mild scenario.”

CORE INFLATION KEY

For Demarco, the most important signal in recent inflation releases came from the fall in the core gauge, which he took as a sign that higher energy costs are not feeding through broadly into the economy more than expected.

“Core inflation, even though we do not target core inflation per se, is a very good indicator where inflation is heading,” he said, noting that headline readings can be distorted by temporary movements in energy prices due to tax measures.

“You could have oil prices falling sharply, and that will be definitely a strong negative effect on overall HICP. But if you have core inflation rising, and maybe the drop in energy prices temporarily offsetting that, you could think that inflation has gone down. But the dynamics would be still worrying in that respect,” he said.

 “Core can be the change of dynamic to see, like, things are starting to improve.”

AI, R* AND EXCHANGE RATE

The ECB has slightly raised its estimate of the neutral rate, but Demarco was cautious as to any suggestion that this might reflect productivity gains linked to artificial intelligence.

“I'm not too sure that it's really AI pushing up this,” he said, arguing that cyclical factors linked to the energy shock and higher defence spending may be playing a bigger role. Policymakers should wait until the effects of the latest shock dissipate before drawing conclusions about the long-term implications for monetary policy and the neutral rate, he added.

Demarco said recent euro weakness against the dollar was largely irrelevant from a monetary policy perspective. A move from around USD1.16 to USD1.14 was “not a dramatic effect,” he said, attributing most of the adjustment to changing expectations around Federal Reserve policy rather than any deterioration in the euro area outlook.

MNI INTERVIEW: Policymakers Must Not Stifle AI - IMF's Adrian

Policymakers should remain alert to financial stability risks posed by artificial intelligence, but must avoid designing regulatory frameworks that focus exclusively on downside scenarios and end up stifling productivity gains, IMF Monetary and Capital Markets Director Tobias Adrian told MNI.

“Certainly the policy has to be concerned with the downside risks, but also has to provide room for the opportunities to realise," Adrian said in an interview on the sidelines of the European Central Bank Forum in Sintra.

As financial authorities around the world grapple with the rapid deployment of AI in lending, trading and risk management, the challenge is to strike the right balance between supervision and innovation, he said.

While concerns have emerged that AI-driven trading models could amplify market volatility or reinforce herding behaviour during periods of stress, Adrian noted that financial markets have long been vulnerable to similar dynamics driven by human decision-making.

"Humans have proven to be susceptible to herd behaviour, to panicking in certain moments, and to have behavioural biases," he said.

The key issue is not artificial intelligence itself but how it is deployed and governed, Adrian argued. While poorly-designed systems could amplify market stress, AI could also improve market efficiency and accelerate the incorporation of information into asset prices.

"You could use this artificial intelligence for contrarian investment strategies and to enhance market efficiency," he said. (See MNI INTERVIEW: Gains From AI Productivity Boost To Vary Widely)

AI AND PRODUCTIVITY

While evidence that AI boosts productivity at the company level is already strong, Adrian said it remains unclear how quickly those gains will translate into aggregate numbers.

"What we see in artificial intelligence for the moment is that at the microeconomic level, there's very good evidence that productivity is going up," he said. "But we haven't seen that translate into higher aggregate productivity growth yet."

The timing of that transition could have important implications for bond markets as rising long-term yields across major advanced economies can be interpreted either as a sign of stronger future growth driven by technological advances or as evidence of growing concerns over fiscal sustainability.

"The optimistic view is that this is about AI. This is signalling higher growth in the future, the pessimistic view is that that is about fiscal policy globally,” he noted. (See MNI INTERVIEW: AI Boom Doesn't Justify Lower Rates - Haskel)

REGULATION, LEVERAGE AND GLOBAL COORDINATION

On broader financial stability risks, Adrian said regulators are increasingly focused on leverage and liquidity vulnerabilities in non-bank financial institutions, including hedge funds, private equity firms and private credit funds.

Despite calls in some jurisdictions for lighter banking rules, Adrian argued that resilience should remain the foundation of regulatory reform. While some elements of the post-crisis framework could be simplified, overall capital levels should not be weakened.

"You can make it easier for businesses to understand how to navigate the regulatory environment without compromising on overall resilience," he said.

Adrian also rejected concerns that growing geopolitical fragmentation is undermining international crisis-management capacity, arguing that institutions such as the IMF and the Bank for International Settlements have become even more valuable as channels for information-sharing and policy coordination and that they continue to work well under current circumstances.

"The exchange of information, the sharing of information is even more important today in the more fragmented world than it was in the world that was more united," he said.

"I think that institutions such as the IMF or the Bank for International Settlements... are extremely important institutions, and they continue to work very well as platforms for convening policymakers and for exchanging views."

MNI INTERVIEW2: PBOC Short-Term Rates Focus To Cap Volatility

The strengthening of the People’s Bank of China’s control of short‑term rates will help curb funding volatility arising from increased government bond issuance, a prominent Chinese economist told MNI, adding that consolidating the new monetary framework will require reductions in banks’ reserve requirements.

The central bank's shift of policy focus to the overnight rate and its plan to introduce an overnight facility are driven by the fact that overnight fund transactions now account for more than 80% of interbank market turnover, said Sheng Songcheng, Research President of China Chief Economist Forum and senior advisor of CEIBS Lujiazui Institute of International Finance.

This will help reduce funding volatility caused by government bond issuance and trading, which have become key variables affecting interbank liquidity, he said in an interview. (See MNI INTERVIEW: Yuan In Steady Upward Trend - Sheng Songcheng)

This week, the PBOC officially launched the overnight reverse repo facility in its open market operations, with injections of CNY300 billion on Monday and CNY600 billion on Tuesday, though it refrained from disclosing the facility’s interest rate.

The experience of Western countries shows that stablishing a price‑based monetary policy framework centred on interest rates requires relatively low reserve requirements for banks, said Sheng, a former head of the statistics department at the PBOC.

At 6.2% in weighted average terms, China's financial institutions still face high reserve requirements, Sheng said, adding that the central bank could cut these requirements this year, particularly given limited scope to boost the economy with interest rate cuts.

Lowering interest rates reduces savers’ interest income while making little difference to companies’ investment plans, which depend more on potential risks and returns, he noted. Rate cuts would also hit banks already struggling with squeezed interest margins and facing significant deposit outflows. Some CNY65 trillion in resident deposits mature this year, according to Sheng’s estimation based on financial reports by listed banks. There were CNY167 trillion of total household deposits at the end of 2025, and the share of maturing time deposits is about 39%, he said.

BOOST FROM RRR CUTS

Meanwhile, each 0.5‑percentage‑point cut in reserve requirements can supply about CNY1 trillion in liquidity to an economy which Sheng said is undergoing a rocky transition from old to new growth drivers. While exports have shown resilience, growth in investment and consumption slowed significantly in the second quarter, with investment in the traditional real estate and manufacturing sectors a major drag, even as the boost to consumption from trade-in policies has weakened and subsidies for new energy vehicles have been tapered.

Pressure on growth is likely to increase over the rest of the year, Sheng said, though he added that it will be increasingly be driven by new industries, noting that from January to May, investment in intellectual property products grew 9.3% year-on-year.

In order to maintain momentum, authorities urgently need to accelerate implementation of policies aimed at promoting urban renewal, upgrading infrastructure and improving social welfare, he said. China needs to stabilise its property market in a bid to ensure stable employment and increase residents' income in order to restore confidence and unleash domestic demand, he said.(See MNI INTERVIEW2: Chinese Economist Suggests QE To Boost Demand)

LOAN GROWTH

Some commentators have pointed to low loan growth as indicative of broader weakness, but Sheng pointed out that much of this reflects a shift in corporate financing from bank credit to the bond market. Bond and equity financing together accounted for 47% of aggregate financing to the real economy in 2025, exceeding loans, at 45%, for the first time, noted Sheng, who led the introduction of the AFRE metric when he worked at the PBOC.

AFRE data also show that incremental financing in China's central and western regions has been on the rise, while their share of national GDP has increased, indicating that financial resources are tilting towards the regions, Sheng said.

MNI POLICY: Strong Inflation View To Risk Early BOJ Hikes

The Bank of Japan will give serious consideration to a pre-emptive increase in its 1.0% policy rate by October or earlier after upward revisions to corporate inflation expectations in the June Tankan survey heightened concerns over stronger underlying inflation, MNI understands.

Bank officials are likely to assess at the July 30-31 policy meeting whether the latest data warrant changes to the baseline inflation outlook or the balance of risks, while continuing to evaluate the need for further hikes, following the Board's decision to increase the rate in June.

While the BOJ has no fixed timetable for hikes, officials generally take several months, or about half a year, to assess the impact of previous rate hikes on the economy and financial conditions. Markets have only priced in 21 basis points of tightening by December with a 35% chance of a hike in October. 

However, corporate inflation expectations in the Tankan have reinforced the BOJ's concern that underlying inflation could prove stronger than projected, along with developments in private consumption, and could drive stronger underlying inflation amid faster-than-expected cost pass-through. (See MNI POLICY: BOJ To Consider Faster Hikes On Underlying CPI)

TANKAN RESULTS

On average, companies expected the annual consumer inflation rate to be 2.7% one year ahead in June, up from 2.6% in March, and 2.6% three and five years ahead, both 10bp higher and the strongest readings on record, the survey showed. 

The diffusion index measuring the share of firms reporting rising prices minus those reporting falling prices among major manufacturers rose to 40 in June from 28 in March, the highest level since April 2022. The index for major non-manufacturers also stood at 40, the highest level since comparable data became available in 1983.

The results illustrate that businesses remain willing to pass on higher labour and material costs to customers, despite sluggish consumption, contributing to an increasing polarisation in consumer spending. 

The BOJ said in June that the pass-through of higher crude oil costs in business-to-business transactions has been progressing at a relatively fast pace, raising the possibility that price increases will spread to consumer goods across a broad range of categories. Beyond higher costs, BOJ officials are also concerned that robust economic activity, supported by strong AI-related demand and fiscal stimulus measures, could generate additional upward pressure on underlying inflation and strengthen the case for further hikes.

WEAK YEN 

BOJ officials believe broad-based dollar buying, driven by expectations of further Federal Reserve rate hikes and concerns over Japan's fiscal position, has driven recent yen weakness, which has hovered around JPY161 against the dollar and neared JPY163 overnight, pushing up import prices and maintaining pressure on firms to raise selling prices. (See MNI POLICY: Weak Yen Stokes Concern; Govt Clouds Rate Path) 

Japanese authorities have few effective tools to change the market's dollar-buying bias unless investors come to expect larger and sustained BOJ rate hikes amid concerns the bank is behind the curve.

MNI INTERVIEW: Fed Independence Still On Shaky Ground - Judge

A pair of U.S. Supreme Court rulings Monday on the president's ability to fire officials at independent agencies do not guarantee future Federal Reserve independence and leave Governor Lisa Cook vulnerable to further attempts to remove her, Columbia Law School professor Kathryn Judge told MNI.

"The news is helpful in protecting Federal Reserve independence, but the decisions by no means guarantee ongoing independence, either as a legal matter or as a matter of democratic legitimacy," she said in an interview. 

Cook can remain in her job while her case challenging Trump’s attempt to fire her proceeds in district court, the Supreme Court said. That fight will take some time, and the justices left the door open for round two if the Trump administration wants to try again to get rid of Cook, Judge said. 

"There's a number of novel legal issues that are at play in the president's effort to fire Lisa Cook," she said. "There's no case law or precedent to look to." 

The court's other decision Monday in Trump v. Slaughter, allowing the president to fire officials at other independent agencies for any reason, "makes it all the more challenging by suggesting there are significant constitutional considerations, but also historical considerations that shape how cause should be understood."

The question of whether Trump could fire or demote Fed Chair Kevin Warsh remains unsettled, at a time when inflation is high yet the president is calling for rate cuts, Judge said. 

"One of the key issues that does remain open is whether Trump can demote a chair to becoming a pure governor, and there was nothing in today's opinions that resolved those issues, and if anything, the Slaughter case potentially makes it easier for a president to demote a chair."

CHANGING SURROUNDINGS

The Slaughter ruling gave the president sweeping new authority over approximately two dozen multi-member agencies that Congress intended to be independent, and leaves Fed independence on shakier ground than it has been in over 90 years, Judge said.

It wasn't until the court's 1935 decision in Humphrey’s Executor v. United States -- now overturned in Slaughter -- that Congress put in protections for Fed officials in the Banking Act of 1935. Previously, Congress had removed the "for cause" protection that members of the Fed board of governors enjoyed under the Federal Reserve Act because they didn't think it was constitutional. 

"The Fed really rose to independence alongside and in tandem with the rise of independent agencies generally," said Judge, who is working on a book about how the Banking Act of 1935 reformed the Federal Reserve System. 

"It's important not just as a legal matter, but as a matter of democratic legitimacy, for the public to believe, and for Congress to believe that there is a reason for the Fed to remain independent. The rationale of expertise and long-term decision making that the Fed has traditionally relied on is no longer going to suffice," Judge said. 

Champions of Fed independence should emphasize the Fed's unique structure to make a convincing argument, she said. 

"It's important to lean in to the distinct characteristics, and in particular the Fed's distinct decentralized structure, and the way that the reserve banks can promote accountability in helping the public to understand why the Fed deserves the special treatment that it seems to be getting." (See: MNI INTERVIEW: Fed Regional Banks Key To Independence - Judge)

REGULATORY POWERS

Whether the exception the court carved out for the Federal Reserve this week extends to monetary policy functions only or shields the central bank more broadly from presidential control remains uncertain, Judge said.

"The Federal Reserve today looks very different than the First or Second Bank of the United States, and in particular it has a whole variety of regulatory responsibilities that are very similar to regular responsibilities being carried out by the Comptroller of the Currency and by the Federal Deposit Insurance Corporation," she said.

"One of the interesting and challenging questions going forward will be how the Federal Reserve Board carries out those powers, consistent with protecting its independence over monetary policy."