Federal Reserve Chairman Jerome Powell arrives to attend a press conference following a Federal Open Market Committee meeting at the William McChesney Martin Jr. Federal Reserve Building on July 31, 2024 in Washington, DC.
Andrew Harnick | Getty Images
If the Federal Reserve is getting ready to cut interest rates, some in the market are getting impatient for dinner to be cooked.
“What do they want? Claudia Thurm, chief economist at New Century Advisors, told CNBC shortly after the Fed finished meeting on Wednesday. “The bar has been set pretty high, and this doesn’t make much sense. The Fed needs to start the process of gradually getting back to normal, and that means gradually lowering interest rates.”
Known for creating the “Sam rule,” which uses changes in inflation to signal recession, Sam has been a strong advocate of central banks loosening monetary policy to avoid dragging the economy into recession, which occurs when the three-month rolling unemployment rate rises 0.5 percentage points above its 12-month low.
With an unemployment rate of 4.1 percent, the Fed is just a hair away from triggering restrictions, and Sam said the Fed’s insistence on keeping short-term interest rates at their highest level in 23 years is putting the economy at risk.
“We don’t need a weak economy to get some inflation under control,” he said. “We don’t need to be afraid of a boom. Once inflation is under control or on track, it’s OK. The Fed can step aside.”
Asked about the sum rule at a press conference after the meeting, Fed Chairman Jerome Powell said that while the sum rule is a “statistical regularity,” it doesn’t necessarily apply this time because employment conditions remain strong and the pace of wage growth is slowing.
“The labor market is normalizing, jobs are being created, wages are rising at a fairly strong rate, but they appear to be tapering off,” he said. “If they show anything more, we’re well positioned to respond.”
A cautious approach
However, markets are pricing in an aggressive rate cut, with a 0.25 percentage point cut starting in September – the first since the early days of the coronavirus crisis.
The market has since been expecting rate cuts in November and December, with CME Group’s 30-day federal funds futures index, FedWatch, putting the odds of a one percentage point cut in the federal funds rate by the end of the year at about 11%.
Instead of easing off the brakes, the Fed said Wednesday it would keep its overnight interest rate in a range of 5.25% to 5.5%. In a statement after the meeting, it noted progress on inflation but reiterated that policymakers on the rate-setting Federal Open Market Committee needed “greater confidence” that inflation would return to 2% before they were ready to cut rates.
DoubleLine CEO Jeffrey Gundlach also believes the Fed is risking a recession by keeping interest rates on hold.
“I’ve been in the business for over 40 years, and I certainly agree. It seems to happen every time,” Gundlach told CNBC’s Scott Wapner on “Closing Bell.” “Other fundamental aspects of the jobs numbers aren’t getting better. They’re getting worse. So when you start to get to a high level where you have to start lowering rates, it’s going to be much harder than you might think.”
In fact, he thinks the Fed could end up cutting rates by 1.5 percentage points over the next 12 months, a more aggressive pace than policymakers indicated the last time they updated their “dot plot” of individual forecasts.
Gundlach predicts that the consumer price index will soon fall below 3%, making the gap with real interest rates, or the federal funds rate, especially high.
“Even at plus 1.5 percent real rates, that means there’s 150 basis points of room to cut. I wouldn’t think they’ve gone too far in cutting rates,” he said. “Frankly, I think they should have cut today.”
