MNI INTERVIEW: Fed On Hold Through Next Year - Groen

The Federal Reserve will likely refrain from raising interest rates through next year, even though elevated price pressures warrant tighter monetary policy, former New York Fed economist Jan Groen told MNI.

"If we're going to have a rate hike this year, it's not going to be before December, and my official view is still that the Fed will be on hold this year and next year, just because of the fact that there's a large camp within the FOMC that prefers to stay on hold to keep bringing inflation down, rather than actually proactively moving into a much more restrictive territory," Groen said in an interview. 

Groen said this FOMC holds the typical Fed attitude of taking a long time to restrict inflation, rather than in the opposite situation, for example when there's a slowdown in the labor market and the monetary policy reaction comes more quickly. "I think there is a big camp within the FOMC that is still convinced that inflation, core inflation in particular, will switch down to a much slower momentum later this year, going into next year, and they prefer to wait and see how that evolves."

A majority of Fed policymakers are "very content that policy is in a good place to wait and see whether that inflation dynamic will indeed materialize or not," Groen said. "That takes out this year, and next year is a similar thing." (See MNI INTERVIEW: Fed Set To Hike Rates Once This Year-Haslag) 

INFLATION

Nonetheless, Groen argues that the Fed should have hiked earlier this year and that underlying inflation is on a path above the central bank's 2% target. 

"Inflation momentum is going in the wrong direction, even before the Iran war and all the energy-related shocks that we had," he said. "I am still of that opinion even though we had now two months of relatively benign inflation prints in June and July. The underlying trend of inflation is still quite elevated, certainly relative to the Fed's 2% inflation target." 

Trend inflation is closer to 3%, there's a long echo effect from structurally higher tariffs with impacts that are still to come on core inflation, and the impacts from the Iran War and the energy price increases still have yet to feed through to inflation, said Groen, now chief U.S. economist at Societe Generale.

"Usually, a persistent oil supply shock takes about six to nine months to really start to show up visibly, like measurably, in core PCE inflation. I still think that is working itself also through the data, as we speak." 

The Fed should have started hiking in March, Groen said.

"Essentially, I think the Fed just hasn't done enough to really bend that trend down towards 2%," he said. (See MNI INTERVIEW: Fed To Consider Hike in Sept - Lockhart) 

"Starting rate hikes in March would have been the more preferred path for monetary policy. But I also know that that's not very likely for the Fed to do, because when it comes to making policy more restrictive, they are a lot more cautious," he said. "That's just the tradition in the Fed."

Groen also questioned whether even three rate hikes, reversing last year’s cuts, would be enough to bring inflation to target, noting a potential rise in the neutral rate. 

GROWTH

Additionally, the labor market is in a very stable place, he said. "Stable but not super buoyant labor demand and maybe even contracting labor supply. That means that you have a relatively stable labor market,” he said.

Groen also remains upbeat in terms of economic growth in 2026, and expects GDP to expand by 2.3% in Q4 over Q4 2025. "I think the consumer is still in pretty good shape," even despite Friday's downbeat retail sales report, he said, noting that the Atlanta Fed's GDPNow gauge points to expansion of 4.3% this quarter.

President Donald Trump's One Big Beautiful Bill Act has continued to boost growth and the consumer, Groen said, while recent tariff refunds have accelerated that trend. 

MNI INTERVIEW: RBNZ Needs 3% OCR ASAP - Ex Dep Gov

The Reserve Bank of New Zealand erred by not raising the Official Cash Rate in May and should quickly return the 2.5% rate to its estimated 3% neutral level, former Deputy Governor and Board Deputy Chairman Peter Nicholl told MNI, despite noting unemployment was likely to continue rising.

"It may not come to stagflation, but there have been policy mistakes in almost every area, in my view," said Nicholl, who served as chair of the Monetary Policy Committee between 1990 and 1995 and played a pivotal role in designing, and implementing New Zealand's pioneering inflation targeting framework. 

According to Nicholl, Governor Anna Breman had kept the OCR below neutral for too long while inflation had risen above 4%, and he criticized her casting vote to leave rates unchanged in May after the MPC split 3-3 between its external and internal members. (See MNI RBNZ WATCH: Gov Breman Says Hike Incoming After Hold Vote) 

"Inflation has been above their target band for more than a year, and now unemployment is going back up. So it's a terrible starting point," he said. "In my view, that's just bad central banking," Nicholl said, adding a 3% rate would give the Bank options. "I would do two 25bp increases. I might even do a 50bp increase. Then you look at where you are. You've now got the rate sitting at neutral, and you've got the option to go in either direction, which I don't believe they have at present."

Markets currently see the OCR peaking at about 3.3% by June 2027. 

HIGHER UNEMPLOYMENT, INFLATION

Nicholl said higher unemployment would disproportionately affect younger people and could encourage them to move to Australia, pointing to Q2's 5.6% unemployment rate, up 20bp.

Higher interest rates would also have only a limited impact on some components of inflation, including local government rates and electricity costs. "For quite a while, even when inflation was above target, traded goods prices were going down. It was internal inflation that was the problem, and that's still the case," he said, noting the OCR has little impact on local council rates, which could rise further due to forced amalgamations.

Nicholl said he was sceptical of the RBNZ's forecasts, which envisage inflation returning to 2% by September 2027. "When you do a big restructuring of any industry, it's the same with local bodies, there are large upfront costs related to amalgamation, and you have to meet them early on, while the benefits come much later – and sometimes don't actually appear at all."

GLOBAL RISKS

Central banks globally were facing an unusually uncertain environment, with risks stemming from U.S. fiscal policy, financial markets and geopolitical developments, said Nicholl, who also served as governor of the Central Bank of Bosnia between 1997 and 2004.

"There could easily be another financial shock coming out of America. The fiscal position in America is terrible. Interest rates are going up despite the Federal Reserve, and it wouldn't surprise me if we had another global financial crisis coming out of America if things don't change."

He also pointed to risks surrounding Japan's large holdings of U.S. government securities and the U.S.'s recent intervention in the yen, noting the American government was aware of the risk it faced should U.S. Treasuries experience a major selloff. The current environment was unusually uncertain and he warned policymakers should avoid adding to that uncertainty, recalling a conversation with Fed Chairman Paul Volcker, who said the worst thing policymakers could do for the private sector was to generate uncertainty. 

MNI: China H2 Fiscal Outlook To Stabilise Steel Demand

The year-on-year decline in China’s domestic steel demand is likely to narrow in the second half of 2026 as fiscal support, resilient manufacturing demand and infrastructure investment partly offset continued weakness in the property sector, local analysts told MNI.

Wang Guoqing, head of research at Beijing-based commodity research firm Lange Steel, expects apparent crude steel consumption to continue falling y/y in H2, but said the pace of contraction should ease from the 3.5% y/y decline recorded in H1.

The moderation was already evident toward the end of H1, with the decline in apparent crude steel consumption narrowing by 0.5 percentage points from the January-May period, Wang said. The July Politburo meeting's call for stronger countercyclical adjustment, faster fiscal spending and accelerated deployment of bond proceeds should provide structural support for steel demand rather than trigger a substantial rebound, Wang said.

Infrastructure funding should provide further support in H2 as more projects come online, said Zhang Yabin, senior analyst at steel research firm Zhonggangwang. China issued CNY2.4 trillion in new special-purpose bonds from January through July, equivalent to 54.7% of the annual issuance plan, Zhang continued.

Around CNY2 trillion of the remaining quota will be issued from August onward, with funding primarily directed towards 109 major projects under the 15th Five-Year Plan. Zhang expects the spending to stimulate construction steel demand directly. However, the moderate pace of fund deployment means it is unlikely to generate the type of demand surge associated with aggressive stimulus, Zhang cautioned.

Lü Keqiang, senior analyst at Zhonggangwang, expects H2 steel demand to stabilise at a low level with a mild seasonal rebound, leaving full-year demand growth between -1% and 0%. He pointed to automobiles, shipbuilding and new energy as key areas of strength. Shipbuilders have substantial order backlogs, while concentrated vessel deliveries in H2 should underpin demand for shipbuilding plate, he said.

The rollout of CNY800 billion in new policy-based financial instruments, designed primarily to provide or supplement project capital, should also support a recovery in demand, while urban renewal and construction of the Six Networks will provide additional support for infrastructure-related steel consumption, Lü added. (See MNI EM: Advisors See New Bond Quotas To Bolster China Growth)

PROPERTY DRAG

"The property sector will remain the main drag on construction steel demand," Wang said. Property developers' finances are recovering only slowly, while persistently weak land sales leave little foundation for a rebound in land purchases or new construction starts. Wang expects full-year real-estate development investment to fall 13%-15% y/y. The government's focus on housing completions and urban renewal will generate some additional steel consumption but will not be sufficient to offset demand lost from new housing development, he said.

Lü expects steel demand from building construction to fall by 18-19 million tonnes over the full year, with H2 demand dropping around 20% y/y.

PRICE

Zhang predicts rebar will trade within a relatively narrow CNY2,950-3,200/tonne range during H2, with some valuation recovery but no sustained sharp move in either direction. Supply contraction should establish a floor under prices, Zhang said, noting that rebar production fell by 105,100 tonnes to 1.89 million tonnes in the first week of August, while ongoing crude steel production cuts and deep industry-wide losses leave mills with little incentive to raise output.

The one-month Shanghai Futures Exchange rebar contract was trading at around CNY3,016 per tonne on Aug. 14. Analysts previously told MNI prices were likely to trade in a CNY3,050-3,250 per tonne range during Q2. (See MNI: China's Steel Futures To Rise Before Falling In Q2)

Wang also expects rebar prices to remain range-bound in H2, with the market likely to establish a low in Q3 before staging a modest recovery in Q4. High inventories and seasonally weak demand will keep prices under pressure in Q3, Wang said. Seasonal demand should improve in Q4, while tighter crude steel production controls could trigger temporary price rebounds.

MNI NORGES WATCH: Holds And Leaves Hike Question Hanging

Norges Bank left its policy rate on hold at 4.25% in August, responding to the recent marked inflation undershoot relative to its forecast, whilts also altering its guidance to leave the question hanging whether a hike will prove to be necessary.

At the June meeting, when the Norwegian central bank had competed a quarterly forecast round, its own rate path fully priced in a Q3 hike and it stated that "it will likely be necessary to raise the policy rate further at one of the forthcoming monetary policy meetings".However, the new August guidance was less explicit. After noting the inflation undershoot the bank's policy committee by 0.6 percentage point in the latest release it simply stated that as it was too early to conclude if the outlook had changed materially and "It may thus still become necessary to raise the policy rate.”

Governor Ida Wolden Bache cited the undershoot in imported inflation as one area that the bank would look at again in the September forecast round, with the extent and speed of the passthrough all factors that need considering. The krone, which can move sharply in line with oil price news, is always a wildcard for the central bank which relies on a constant projection for the krone on an imported weighted basis.

"Imported inflation increased quite markedly earlier in the year. It has come down, it has been lower than expected, and then naturally you look at so the underlying drivers," Wolden Bache told MNI in an interview following the latest policy decision (See MNI INTERVIEW: FX Impact Eyed As Inflation Misses- Norges Head )

OPTIONS OPEN

Following the announcement and the new guidance analysts' quick responses highlighted the uncertainty over whether a hike would now materialize, with Norges Bank perceived to be leaving its options open.

In the published policy discussion accompanying the August decision committee members signalled that a downward revision to the near-term inflation outlook looks more than likely in the September forecast round.

That Norges Bank’s using the in-house real time forecast, which weighted from a set of models, "the inflation forecasts for the coming quarters have been revised down since June."

Softer food prices, some weakness in service prices and lower imported inflation all point to a less marked overshoot of the 2% target than previously assumed. 

Wolden Bache was at pains to stress that a rate hike remained on the table but the certainty around it has clearly diminished.

MNI INTERVIEW: FX Impact Eyed As Inflation Misses- Norges Head

Norges Bank overestimated imported inflation in the June quarter projections and will look afresh at one suspected factor behind the undershoot, namely exchange rate passthrough, Governor Ida Wolden Bache told MNI.

The central bank left the policy rate on hold at 4.25% earlier Thursday after the target core inflation rate (CPI-ATE) came in at 2.7% in the latest July reading, 0.6 percentage point lower than Norges Bank had assumed in its June Monetary Policy Report forecasts when it said price impulses to imported intermediate goods would "increase further over the coming quarters".

"We looked at the numbers for imported consumer inflation. Imported inflation increased quite markedly earlier in the year. It has come down, it has been lower than expected, and then naturally you look at so the underlying drivers," Wolden Bache told MNI in an interview following the latest policy decision.

"Is there anything to do with international price impulses, with the exchange rate. There was one hypothesis that this could, and ....I also mean the uptick in inflation that we had earlier in the year ... eflect a different dynamic relationship between the exchange rate and inflation," she said.

Norges Bank projections typically assume that the krone -- on an imported weight basis -- will flatline. But as Norway is a major oil producer, it is clearly sensitive to the current highly volatile oil price, acting as an inflation and disinflation shock absorber.

Wolden Bache does not foresee any immediate shift away from the constant exchange rate forecast but she does not rule it out.

"We haven't taken anything from recent developments in oil prices, say, or the correlation with the exchange rate that suggests that that we will change that practice in the immediate future ... But it's something that we emphasise in when we describe the risk outlook ... That yes, if there's opening of the Strait of Hormuz, if energy prices come down more quickly than we have assumed, the impact on inflation will also depend on how the exchange rate moves," she said.

"Of course, we we are aware of that correlation. That's not necessarily stable, but that's been there all the time," she added.

SHIFTING GUIDANCE

Back in June, the policy statement said "it will likely be necessary to raise the policy rate further at one of the forthcoming monetary policy meetings" but the August guidance was less explicit, stating tha "it is too early to conclude that the inflation outlook has changed materially. It may thus still become necessary to raise the policy rate.”

Wolden Bache stressed that rather than attempting to keep guidance in place for a period of time, the approach was to adjust it to reflect the policy committee's latest assessment.

"The committee is still concerned that inflation is too high, and there is uncertainty about the inflation outlook ...it can still become necessary to to raise the policy rate. That's the best expression and reflection of the discussion that the committee had," she said.

CORRECTS-MNI INTERVIEW: Heat May Add 0.67pp EZ Food Inflation

(Corrects story first published on Aug 13 to make clear food price inflation and not overall inflation could be pushed up by 0.67pp)

Euro area food price inflation could be at least 0.67 percentage points higher due to lower agricultural yields after Europe's extreme summer heat, as the increasing frequency and intensity of extreme weather events makes it probable that this underestimates their effects, an economist at the Potsdam Institute for Climate Impact Research told MNI.

With the UK Met Office saying the summer of 2026 is on course to become the hottest on record, Maximillian Kotz, who is also affiliated with the Barcelona Supercomputing Centre, said in an interview "the closest thing that we can try and compare to is ... the 2022 summer for European food price," although this is likely an underestimate of future risks.

A paper he co-authored with ECB economists had found that "the heat in those three months of June, July, August (2022) caused a 0.67 percentage point increase in food [inflation]," separate from the effect of events including Russia’s invasion of Ukraine, while the impact of back-to-back extreme events could be greater. (see MNI INTERVIEW: UK Inflation Expectations More Loosely Anchored )

"We're going to ... get to regimes where these extremes might come back-to-back, and the dynamics start to become different as a result of that, or ... we get to temperatures that we haven't experienced before, and we potentially therefore also have effects that these models haven't been able to see," he said.

Kotz's analysis considered multiple factors, including excessive rainfall or drought, and found the greatest effect was because of temperature extremes.

"Across different crop types and across different regions, the most commonly important drivers are temperature extremes ... For most crops there are essentially temperatures somewhere between 20 and 30 degrees, roughly around 25 degrees, beyond which, if the temperature goes up further, you get really steep declines in agricultural yields," he said.

It is harder to disentangle the effect of high temperatures on finished consumer food products including multiple ingredients, where differing thresholds perhaps offer a smoother response in aggregate, he noted. (See MNI INTERVIEW: UK Consumer Enjoys July 'Burnham Bounce' - GfK)

GLOBAL NATURE

In a historical context “where heat extremes maybe are only occurring in one region at a time, obviously then there's more of a capacity in the supply chains to buffer supply and thereby buffer any impacts on prices for consumers," Kotz dsaid. 

"You're more likely to have bigger effects in those kind of contexts, as well as the possibility for countries to start taking more defensive trade policies."

MNI INTERVIEW: Warsh May Defer To Bessent On FIMA Usage

Federal Reserve Chairman Kevin Warsh may not oppose expanding and allowing the FIMA repo facility to be used for currency intervention, on grounds that decisions over international facilities ultimately rest with the White House rather than the FOMC, former New York Fed trader Joseph Wang told MNI. 

"You can make a very strong case that the international stuff is a political decision -- that the Fed's swap lines, FIMA facility, that's foreign policy, that's not part of monetary policy independence," Wang said in an interview. "It's definitely gray enough that the president would be given deference."

Treasury Secretary Scott Bessent has encouraged Japan to use the Fed's foreign and international monetary authorities repo facility to fund its yen exchange rate intervention rather than selling U.S. Treasuries, calling on the Fed to upsize its per counterparty limit from the current USD60 billion. As of last Wednesday, the facility had zero usage.  

Allowing the administration to promote the tool for its own purposes is likely not seen by Warsh as ceding core central bank independence, Wang said, adding he's also skeptical that Japan has any real need for the facility. 

Warsh wrote to Congress following his confirmation hearing to say Fed independence does not extend to areas affecting international finance, he noted.

THEATRE

FIMA "could play a role where it's slightly less emergency-driven than the swap lines. So now swap lines would be the ultimate emergency, but you could use this at a level lower," Wang said. 

Outside of the Covid-era dash for cash when a number of foreign authorities tapped the facility, Switzerland also used it in March 2023 to source dollar liquidity amid an acute banking sector crisis. 

It's unclear however whether Japan has any reason to use the backstop, as it has many better sources of dollar liquidity, Wang said. It can access a standing swap line that it has drawn on heavily in past crises, borrow more cheaply through private repo markets, and holds outsized dollar reserves in the New York Fed's foreign repo pool. 

"I view this as more of just theater to convince the market that you have a lot of dollars to intervene. And maybe if you rope the Fed in and hint that maybe you could really extend the FIMA repo facility pool, then that would create more of a perception that investors should not be fighting this." 

But it isn't likely to work until Japanese interest rates are adjusted, he added. The yen has weakened since the joint intervention last month, last standing at JPY159.06.

DURATION SHIFT

As Warsh's wider balance-sheet reforms take shape, the FOMC will likely move first to adjust the duration of the Fed's asset portfolio rather than its overall size, Wang said.

Of the three parameters shaping the balance sheet debate under Warsh, duration is an "easier conversation" to have, compared to shedding MBS and shrinking the total size of the portfolio. The FOMC will likely endorse slowly moving to a bill-heavier balance sheet by reinvesting in bills, he said.

The MBS issue has broad consensus but no agreed mechanism. Fed officials have ruled out selling MBS at a loss, as doing so would widen the spread between mortgage rates and Treasuries at a moment when the housing sector is already under pressure from high borrowing costs, he said.

The size of the balance sheet is likely to remain largely untouched for an extended period, even though it draws the most market attention, he said. Task force leader Raghuram Rajan is a prominent skeptic of a large balance sheet but co-lead Jeremy Stein has been more sympathetic to a larger footprint. (See MNI POLICY: Warsh Task Forces Will Need To Woo FOMC Skeptics)

FIMA usage would expand the balance sheet but only temporarily, and "I don't think it would bother him," Wang said.    

"The size is the one that's going to take a very long time to change, and it's going to be the least interesting one for quite some time."