Fed's next move is going to be to tighten, says Lindsey Group CEO

Fed is behind the curve. Core PCE inflation is accelerating (3m annualized at 4.4%), forcing a tightening response. The neutral rate is now 4.2-4.7%, implying a significant policy gap. Expect at least 100bps of hikes over the next year, likely 50bps in H2 and 50bps in H1 of next year. The Fed will use the traditional funds rate tool first, not the balance sheet. This isn't transitory; core data confirms underlying price pressures.

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The Lindsey Group 3.0
Management Consulting
Lawrence Lindsey 8.0

Fed's next move is going to be to tighten, says Lindsey Group CEO

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You need at least 50 bps to get to the lower bound of neutral and 100 bps to the higher bound. There has to be some increase in Fed funds.

9/22/2025 4:53:13 PM	short term cautious up	6 days later	+0.51%	+0.25%

Our next guest thinks the Fed's next move will be to tighten, but that doesn't necessarily mean rate hikes.

Speaker1 (anchor)
Larry Lindsey

The Fed is confronting an accelerating inflation situation: last 12 months inflation 3.2%, last 6 months annualized 3.7%, last 3 months annualized 4.4%. The new chairman must do something reasonably quickly to reassure markets.

An accelerating trajectory is one thing you really don't want to see.
Joe LaVorgna cited the same 4.4% annualized core inflation stat and said the Fed should hike by 100 basis points.

Speaker1 (anchor)
Larry Lindsey

I don't think they'll do it all at once. If they go the rate hike route, my bet would be 50 bps the rest of this year and 50 in the first half of next year.

It's up to the chairman and the incoming data.
Larry Lindsey

The neutral Fed funds rate is real between 0.5 and 1. With 6-month inflation at 3.7%, neutral Fed funds is between 4.2% and 4.7%. We're a long way from there. You need at least 50 bps to get to the lower bound of neutral and 100 bps to the higher bound.

Neutral means you're not accelerating inflation and not decelerating inflation. So there has to be some increase in Fed funds.
You also think his first move to tighten will be on the balance sheet side?

Speaker1 (anchor)
Larry Lindsey

In the end, when he looks at the pros and cons of raising the Fed funds rate versus tightening the balance sheet, he'll find going the traditional route of using the Fed funds rate is the way to start. I don't know if it's a good idea to start off with something new and radical.

Kevin Warsh is a very persuasive guy and wants to lead a reform-oriented Fed, but the traditional route is preferable.
Do you think these price pressures are transitory?

Speaker1 (anchor)
Larry Lindsey

Some of them are transitory, but the numbers I gave were core PCE deflator which runs below CPI and excludes oil and food. Oil is probably the biggest transitory factor. I think you do have underlying inflation in the economy.

The core PCE deflator took out the effects of oil and food, so underlying inflation remains.

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