Federal Reserve Chairman Jerome Powell speaks during a news conference following the Federal Open Market Committee meeting at the William McChesney Martin Jr. Federal Reserve Building in Washington, DC, July 31, 2024.
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If the Fed begins working on a rate cut, some parts of the market will be impatient for dinner to be served.
“What are they looking for?” Claudia Sahm, chief economist at New Century Advisors, told CNBC after the Fed’s meeting on Wednesday. “The bar is set quite high, which really doesn’t make a lot of sense. The Fed needs to start the process of gradually returning to normal, which means gradually lowering interest rates.”
Known for its formulation Sam’s Rules Using changes in inflation rates to gauge when a recession occurs, Sam has been calling on central banks to start easing monetary policy to avoid dragging the economy into recession. The rule states that an economy enters a recession when the three-month average unemployment rate is half a percentage point above the 12-month low.
The 4.1% unemployment rate is only a short distance away from triggering the rule, and Sam said the Fed’s insistence on keeping short-term interest rates at the highest level in 23 years is endangering the economy.
“We don’t need a weak economy to shake off the last bit of inflation,” she said. “We don’t have to be afraid of a good economy. If the inflation job is done, or we’re on a downward path, that’s fine, the Fed can start unwinding.”
Asked about Sam Rule during his tenure Press conference after the meetingFed Chairman Jerome Powell Call it a “statistical pattern,” but it doesn’t necessarily hold true this time, as employment remains strong while wage growth slows.
“It looks like the labor market is normalizing, jobs are being created, wages are pretty good, strong growth but gradually declining,” he said. “If it turns out… it shows something more than that, then we have the ability to make response.”
Proceed with caution
However, the market expects a radical interest rate cut path of 25 percentage points starting in September, which would be the first rate cut since the early stages of the COVID-19 crisis.
Since then, the market has expected rate cuts in November and December, and according to the Federal Reserve, there is about an 11% chance that the federal funds rate will fall by one percentage point by the end of the year. CME Group’s Fed Watch 30-Day Fed Funds Futures Contract Indicator.
Instead of starting to take your foot off the brake, Fed Wednesday It said it would maintain the overnight borrowing rate within the range of 5.25%-5.5%. this Statement after the meeting It did note progress on inflation, but also reiterated that policymakers at the Federal Open Market Committee, which sets interest rates, need to be “more confident” that inflation will return to 2% before they can prepare to lower rates.
Dual Line CEO Jeffrey Gundlach It is also believed that the Federal Reserve’s tough stance on interest rates is facing the risk of economic recession.
“That’s exactly what I think because I’ve been in this sport for over 40 years and it seems like this happens every time,” Gundlach told CNBC’s Scott Wapner. . “Closing bell.” “All the other fundamental aspects of the employment data are not improving. They are deteriorating. So once it starts to get to higher levels, they have to start cutting rates more than they think they can.”
In fact, he thinks the Fed could end up cutting interest rates by 1.5 percentage points next year, which would be a more aggressive rate cut than policymakers planned when they laid out their rate cuts. Last updated “click image” personal predictions.
Gundlach thinks consumer price index It will soon be below 3%, making the real interest rate or the difference between the federal funds rate and the federal funds rate particularly high.
“If real rates are positive, even half a percent, that means you have 150 basis points of room to cut rates without having to think about whether it’s too much,” he said. “Frankly, I think they should cut production today. “
