Fed should wait for more data before deciding on summer rate cut

By Farzad Vajihi – Analyst of stock market and cryptocurrency, Ph.D. in economics.

After initially trivializing the pandemic-triggered inflation shock as “transitory,” the Fed began a rise in interest rates in March 2022, after policymakers accepted that price pressures would persist and became worried about losing public confidence.

In 12 meetings, the Fed raised its benchmark rate by 5.25 percentage points, averaging nearly half a percentage point per meeting. This included four consecutive hikes of three-quarters of a percentage point, intended to signal determination to control inflation and catch up after a slow start to the tightening cycle.

last July, The Fed’s policy rate reached roughly the same level as during the 2007-2009 financial crisis run-up, and the central bank has held it there since. The length of this period of “restrictive” interest rates will likely rank in the middle of other recent Fed monetary policy cycles.

Officials were surprised by positive inflation trends last year as supply chains and labor markets returned to pre-pandemic behavior. Much of the inflation shock was “transitory” but at a slower pace than expected by policymakers.

All eyes will be on the Federal Reserve’s decisions on 17-18 September, when rate cuts are expected to begin.

Federal Reserve Chair Jerome Powell has stated that these cuts will signify a significant shift in policy from fighting inflation during the pandemic to easing monetary policy.

Where the process ends up is uncertain The changes in supply and investment patterns during the COVID-19 era, new geopolitical tensions, and the potential risk of tariff wars initiated by a second Trump administration could make the Fed’s transition from high interest rates as challenging as its battle against inflation.

Whether September marks the starting point will depend on the data being in line with what Fed officials expect. That includes continued progress in bringing inflation down toward the central bank’s 2% target and a labor market in rough balance with modest wage and monthly job gains.

A new Fed’s policy statement on July 31-30 could offer a changed economic outlook, paving the way for the next round of tapering.

Will disinflation persist?

In recent statements, Federal Reserve officials have expressed optimism about the ongoing decline in inflation. Despite worries earlier this year that inflation was rebounding, recent data has shown a renewed slowing. 

Most economists expect inflation to fall to 2.5% in July. If the downward trend in inflation remains, it may be appropriate to consider lowering interest rates

Will the labor market stay afloat?

federal Reserve Chairman Jerome Powell recently referred to the labor market as being in ‘equilibrium’ a phrase that broadly means that the number of available workers is roughly in line with companies’ demand for labor; the monthly flow of new hires and people quitting is in line with population growth; and wage growth is coming into line with the Fed’s inflation target.

The current 4.1% unemployment rate is about what central bank officials feel is sustainable in the long run with inflation at 2%.

The upcoming employment reports will determine if rising wages and labor shortages still pose an inflation risk. Signs of weakening could impact future rate cuts. 

The unemployment rate has been slowly rising from last year’s historic low and often when the unemployment rate starts to increase, it eventually does so fast.