Economist Jon Faust, a former senior advisor to Fed Chair Jerome Powell, believes that the equations surrounding a rate cut are now fundamentally altered as tensions flare in the Middle East.
What Happened: Faust, an economist who has advised former chairs Ben Bernanke and Janet Yellen before Powell, said that he believes the ongoing conflict in the Middle East could be the biggest external risk facing the Federal Reserve this year, during his interview with MarketWatch late last week.
Israel-Iran tensions are a “major wild card” that could rattle business and consumer confidence and potentially tip the U.S. economy into a slowdown, Faust said, adding that the extent to which the conflict “yields a large rise in oil prices and a further shock to uncertainty, and thereby confidence, is the sort of thing that would tip a slowdown.”
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A Fellow at the Center for Financial Economics at Johns Hopkins University, Faust believes that while a rate cut in December is possible, he wouldn’t bet on it.
“I’d put the odds at 50/50,” he says, noting the Fed will “cut when the data support it, and not until then.”
With the Fed’s latest Summary of Economic Projections due this week, involving an update to the so-called dot plot, Faust warns against reading too much into it, saying that “an equal case could be made for zero, one or two cuts this year.”
Why It Matters: This comes amid growing attacks on Powell by President Donald Trump for not cutting rates fast enough and blaming him for higher U.S. government debt costs, going as far as to calling him a “numbskull.”
Several prominent economists, too, have joined in on this chorus over the past week, with economist Neil Dutta of Renaissance Macro saying that the “Fed policy is too tight,” and that he expects the central bank to act.
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