Source: Jin10 Data
The call for a cut in interest rates by the Fed is growing increasingly louder two weeks later, with economists believing that the risks of waiting are increasing.
On Wednesday, spot gold prices continued to hit historic highs, as recent remarks by Federal Reserve officials boosted bets on a rate cut in September. Earlier, spot gold rose 0.3%, briefly reaching $2473 per ounce. According to CME FEDWatch, the market has fully priced in a 25 basis point rate cut at the September meeting. Federal Reserve Chairman Powell said on Monday that recent inflation readings "bolster confidence to some extent" that the rate at which prices are rising is returning to the Fed's target in a sustainable way, suggesting that a rate cut may not be too far off. Board member Brainard also expressed cautious optimism on Tuesday, suggesting that inflation is returning to the Fed's 2% target level.
More and more Wall Street economists warn that the Fed waited too long after raising rates to their highest level in 20 years before reversing course.
The latest three-month inflation data has been lackluster, coupled with a slowdown in U.S. economic growth and rising unemployment, with many calling for a rate cut at the policy meeting that is due in two weeks, although this seems unlikely. Fed Chairman Powell told an event in Washington on Monday that he would not give any guidance on the timing of a rate cut, and that most of his colleagues on the Federal Open Market Committee, which sets policy, still seem to see no urgent need to act.
Some notable figures, including Goldman Sachs Chief Economist Jan Hatzius, Queens' College Dean Mohamed El-Erian, and Neil Dutta from Renaissance Macro Research, believe that waiting risks are increasing.
In a report released on Monday, Hatzius said, "We believe that the cut should have occurred at the meeting as early as July 30-31. If the reason for cutting rates is clear, why wait another seven weeks to implement it?"
It is widely expected that the FOMC will keep the benchmark rate stable for the eighth consecutive time at its July meeting, marking one year of maintaining the current rate target range of 5.25% to 5.5%. According to futures data, investors are betting on at least two rate cuts by the end of 2024, beginning in September.
Powell said on Monday that recent inflation readings "are actually strengthening some confidence" that inflation is falling back to the Fed's 2% target, and that policymakers are now focused on the Fed's dual mandate of full employment and stable prices. But he also said more evidence was needed before cutting rates.
The reason for easing policy now is that rate adjustments take time and could take a year or longer to have an impact on the economy, so policymakers need to act preemptively to avoid a downturn. Hatzius said that monetary policy guidelines such as the widely watched Taylor Rule suggest that current rates should be around 4%, or more than a percentage point lower than actual rates.
In the past week and a half, calls for a rate cut in July have been growing, with the release of two important monthly reports on employment and inflation. Although the unemployment rate remains relatively low at 4.1%, it has risen month by month over the past three months. The rise in the unemployment rate from its low of 3.4% at the beginning of 2023 has raised concerns about the risk of an economic downturn.
At the same time, inflation, after unexpectedly rising in the first three months of 2024, has been flat in the second quarter. The so-called core consumer price index, which excludes food and energy costs, rose just 0.1% in June, the smallest monthly increase since August 2021. In particular, rent inflation has seen a long-awaited easing, and this trend is expected to continue.
Drew Matus, the chief market strategist at MetLife Investment Management, said, "Waiting too long could result in a higher peak in the unemployment rate and little extra payoff in terms of inflation."
Since the release of the latest inflation data on July 11, Chicago Fed President Charles Evans and San Francisco Fed President Mary Daly have both emphasized that the Fed is approaching the confidence it needs to lower rates. But some are cautious about acting too soon. At their June meeting, officials' projections showed four people thought there should be no rate cut this year, seven forecast one rate cut, and eight foresaw two.
Julia Coronado, founder of MacroPolicy Perspectives LLC, said, "The July rate cut was just more sudden than what the FOMC was leaning toward doing. Waiting for one more meeting is more about the committee's management and getting more data."
In contrast, the FOMC in July could adjust its statement to emphasize the improvement in inflation data, and Powell could use his speech at the Federal Reserve Bank of Kansas City's annual conference in Jackson Hole, Wyoming at the end of August to signal action in September.
The reason for waiting is that the decline in inflation readings has been bumpy since the first quarter. Hawks on the FOMC fear that any resurgence in inflation could lead to a rise in inflation expectations, making it more difficult to reach the 2% target for inflation.
Michael Pugliese, senior economist at Wells Fargo, said, "We have sufficient reason to wait until the September meeting."
Editor / jayden