The Fed is committed to a September rate cut, but there’s a catch

Americans banking on multiple rate cuts this year might be caught off guard after the September meeting.

According to Yardeni Research president Ed Yardeni, a widely expected September interest rate cut could be a one-off as the Fed tries to normalize policy.

“I do think there’s going to be a September cut, but I’m not quite convinced that there’s going to be a lot more cuts after that,” Yardeni said in an interview with Yahoo Finance.

With the economy in decent shape and inflation heading in the right direction, Yardeni said the Fed shouldn’t be in a rush to lower interest rates.

“I thought the Fed’s game plan until recently was to wait until inflation actually does get down to 2% and stays there for a few months," he said.

"And now they seem to be changing the rules and saying, ‘Well, you know, we’re almost there. And that’s getting close enough'."

In his recent testimony on Capitol Hill, Fed Chair Jerome Powell told lawmakers, “You don’t want to wait until inflation gets all the way down to 2%” to begin lowering interest rates.

Powell said waiting that long risks inflation falling below the 2% target, which the central bank wants to avoid.

Who’s right about inflation?

There's a growing debate about whether inflation cooled enough to absorb multiple rate cuts.

Economists who think it did often point to the Fed's trusted core Personal Consumption Expenditures (PCE) index, which posted its smallest increase in more than three years in May.

They also worry that the Fed has neglected one of its mandates to foster full employment.

Since mid-2023, unemployment has been on the rise. At 4.1%, it is dangerously close to triggering the so-called Sahm Rule, which marks the beginning of a recession.

Economists in the cut-rates-immediately camp also say the U.S. economy is slowing faster than expected, so policymakers need to intervene to avoid a recession.

Yet, those on the other side of the debate echo Yardeni’s concerns and warn that rate cuts could fuel another bout of inflation.

According to Carl Weinberg, the chief economist of High Frequency Economics, the Fed’s interest-rate policy is clearly working, which is why policymakers shouldn’t tinker with it in September.

Weinberg said concerns about unemployment have been overblown since the economy is still at or near full employment.

Economist and macro investment researcher Jim Bianco agrees. In a recent interview with Bloomberg, Bianco said, “I don’t think the Fed should be cutting soon because I don’t think the economic data is supporting a Fed rate cut.”

“The slowing that you’ve seen in the U.S. economy might have already bottomed. It is growing at somewhere around 2.5% for the second quarter,” he said.

While inflation has come down, it has “largely been in the 3-4% range for the past year and a half.” The Fed, therefore, should think twice before cutting, according to Bianco.