Source: Jin10 Data
Economists say it's time for the Federal Reserve to take action and start cutting interest rates as soon as possible.
The Federal Reserve is expected to only cut interest rates once this year. However, the latest monthly data has made some economists concerned that the cut may not be timely enough.
On Tuesday this week, the May retail sales data showed that the pace of consumer spending has slowed since last year, easing concerns about the economy overheating in the fight against inflation. In terms of the labor market, although non-farm data exceeded expectations, the unemployment rate rose to 4%, the highest level since January 2022.
Meanwhile, the May inflation data was more optimistic than expected. The rise in CPI in the United States in May was the lowest since July 2022. Combined with May's PMI data, economists believe that the PCE index growth rate of personal consumption expenditures in May may be the lowest this year.
As inflation declines and the economy slows down, Neil Dutta of Renaissance Macro Research believes it's time for the Federal Reserve to take action and cut interest rates as soon as possible. Dutta said this would help the Fed fulfill its other mandate besides price stability - full employment.
Dutta said, "The potential headwinds for core inflation may start to slow from here. For the Fed, the labor market tradeoffs are becoming somewhat stark."
Dutta pointed out that so far, any signs of weakness in the labor market have been seen as signs of pandemic-related supply and demand imbalances, a point Powell has also admitted.
After the Federal Reserve's latest policy meeting, Powell said, "We're seeing a cooling in labor market pressures, moving gradually toward better balance. We're watching closely for signs of any further imbalance, but we're not seeing it now."
But what worries Dutta and the Goldman Sachs economics team is where the data is headed. Job vacancy rates are now at pre-pandemic levels. If it falls further, the unemployment rate usually rises with it, and Dutta explained the Beveridge curve.
As highlighted by the Fed's research center, the further the point on the Beveridge curve along the right axis (highlighted in red below), the less likely an economic soft landing and even a recession.
Dutta said, "I don't think the Fed wants to see labor demand weaken further." He added, "The Fed understands that. The risk now is not for the unemployment rate to surprise to the downside. The most likely outcome is for the unemployment rate to stay stable or rise."
Dutta and other economists are more concerned about how economic data could worsen from now on than its current state. Many are currently not overly concerned about the current trend.
Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said there is a "risk" in the labor market. But it appears more likely at present that U.S. consumers' spending power is slowing at a normal rate rather than falling sharply.
Luzzetti said, "While there is some pressure on U.S. consumers, especially for some households, it would be surprising if the degree of slowing in the labor market and consumer spending were enough to prompt a rate cut by the Fed in September."
Some fear that the Fed could inadvertently wait too long to address inflation and ultimately harm the U.S. economy. With excess savings declining and credit card default rates rising, Mohamed El-Erian, chief economic adviser at Allianz, says small businesses and low-income families, groups that are already struggling with high interest rates, may be left out in the cold.
El-Erian believes that if the Fed waits until the end of the year to cut interest rates, the balance risk facing the Fed will be "tilted toward them acting too late and the economy slowing more than it should."
Editor/Lambor