Source: Jin10 Data
Former Dallas Fed President Kaplan believes that the path of rate cuts by the Fed in September is clear, but the next rate cut may have to wait until December.
Former Dallas Fed President Kaplan said that given the recent progress in inflation, the Fed is likely to cut interest rates in September, but this is unlikely to signal the beginning of a comprehensive interest rate cut cycle.
Kaplan, who left the Federal Reserve in October 2021 and is now vice chairman of Goldman Sachs, said on Thursday: "The path for the Fed to lower interest rates in September is very clear. I think they are very likely to cut interest rates again in December."
He told Bloomberg Television in Tokyo, "This does not mean that the Fed will launch a comprehensive interest rate cut cycle, because the fiscal deficit is high and energy prices remain high. Policy decisions will be made at each successive meeting.
Before Kaplan spoke, several Fed officials, led by Powell, had pointed out in recent weeks that the Fed was making some progress toward its goal of lowering the inflation rate to 2%, but they had been vague about the timing of the interest rate cut.
US second-quarter inflation slowed down, with core CPI rising only 0.1% month-on-month in June, the smallest monthly increase since 2021.
CME's FedWatch tool shows a 100% chance that the Fed will cut interest rates by 25 basis points in September.
Ed Yardeni, president of Yardeni Research, also agrees that the Fed will cut interest rates in September, but he is skeptical that there will be more cuts afterward.
"The fed funds futures market basically expects five interest rate cuts in the next 12 months. The market has been wrong before and may be wrong again." he noted.
He believes the market will be skeptical of expectations for future rate cuts next year. Meanwhile, bond traders are struggling to deal with supply issues as the Treasury issues a large amount of bonds and bills, so he expects the trading range for US bond yields to be between 4% and 5%. "I don't think it will fall below 4%, although some people firmly believe that it will." he said.
Yardeni pointed out that the US economy "looks pretty good" and inflation is "moving in the right direction". "So why rush to lower interest rates?" he questioned.
He said:"Until recently, I thought the Fed's strategy was to wait until the inflation rate actually dropped to 2% before cutting interest rates and waiting for a few months. Now they seem to be changing the rules and saying,'Well, we're almost there'...I'm worried that if they lower interest rates when it's not necessary, the market will collapse."
Editor/Lambor