Charlie Bilello: Those calling for jumbo-sized rate cuts should be careful what they wish for

The last time the central bank cut interest rates by 0.5% was in a recession year
By Sam Bourgi
•
17 September 2024
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As economists debate the merits of jumbo-sized rate cuts, macro strategist Charlie Bilello says they should be careful what they wish for.

In a recent video, Bilello analyzed past instances of the Federal Reserve lowering interest rates by 0.5% instead of the standard 0.25%. The last two times this happened were in January 2001 and September 2007.

Both were recession years.

“If the Fed feels the need to go big because of a weakening economy, that’s not bullish,” said Bilello.

Bilello’s view is shared by High Frequency Economics’ Carl Weinberg, who recently noted that a large rate cut could be interpreted as a sign of panic.

This is because policymakers would only lower interest rates aggressively if they believed the economy was heading toward a recession.

Bilello also isn’t convinced that slowing inflation justifies aggressive rate cuts.

“The Fed is always behind the curve because they’re looking at lagging data,” the strategist said in reference to the central bank’s reactionary approach to CPI reports.

But that doesn’t mean policymakers are going to suddenly play catch up.

The best case for gradual rate cuts is the fact that “inflation is well above trend,” said Bilello.

As Creditnews reported, it wasn’t until July that the CPI fell below 3% for the first time since the pandemic. It would fall again to 2.5% in August, which is still higher than the Fed’s target.

“So, yes, we’re moving down to 2% in terms of the year-over-year rate of change, but that doesn’t erase all of this inflation above that 2% trend over the past two years. We’re still 11% above that trend,” he said.

The Fed takes flak for being behind the curve

Economists like Mohamed El-Erian and Jeremy Siegel believe the Fed’s approach to monetary policy is harming the economy. They think the central bank has been too slow to respond to changes in inflation and broader economic trends.

In El-Erian’s view, the real thing holding the Fed back is its arbitrary 2% inflation target. Because of that, the Fed “has turned into a play-by-play commentator,” he said. “That’s not the role of the Fed.”

Last month, Siegel presented a much more dire assessment of the Fed’s policy measures following the disastrous July nonfarm payrolls report.

At the time, he called on the Fed to convene an emergency meeting to begin cutting interest rates.

“We’ve gone down 90% toward the target on the inflation rate. We’ve overshot the target on the employment. And how much have we moved the fed funds rate? Zero. That makes absolutely no sense whatsoever,” said Siegel.

The emergency meeting Siegel wanted never came. Instead, several Fed officials reiterated Billelo’s view that large rate cuts aren’t necessary and could even be damaging.

However, this hasn’t stopped markets from betting on big reductions in September. As of Friday, CME Group’s FedWatch Tool implied a 45% chance of a 0.5% reduction at the upcoming FOMC meeting. Those odds increased to more than 50% on Monday.

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