Fed’s wait-and-see approach is a ‘mistake,’ economist says
The Federal Reserve’s cautious approach to cutting interest rates in the face of a weakening economy is a mistake that policymakers could soon regret, according to TS Lombard chief economist Steve Blitz.
“Caution will rule at the Fed, it usually does, as they cut 25 [basis points] and wait and see,” said Blitz. “I believe it would be a mistake.”
“For the record, I think they should cut 50 [basis points],” he said.
Blitz acknowledged the difficult position the Fed is in trying to boost economic growth without reigniting inflation.
This delicate balancing act has the Fed overly focused on “ongoing resilience in consumer spending buoyed by rising income,” he explained.
The problem with this approach is it doesn’t address how quickly certain economic indicators are deteriorating.
A rapid rise in unemployment, shrinking job openings, and weaker hiring trends should indicate to the Fed that the economy is moving in the wrong direction.
Based on Blitz’s assessment of the labor market and yield curve, the economy could be heading toward a recession by the fourth quarter.
By the time the Fed realizes this, it could be too late.
The precursors to recession
Blitz’s negative view of the economy is supported by the central bank’s own research.
The latest edition of the Fed’s Beige Book publication showed that economic conditions in nine of the central bank’s 12 districts are either stagnating or declining.
According to economist David Rosenberg, this means three-quarters of the U.S. economy is slumping.
Business executives interviewed by the Fed noted a decline in hiring expectations and growing concerns about consumer spending.
These and other factors have led economic analyst Amy Nixon to suggest the U.S. could already be in a recession.
“After November, the recession will be backdated,” said Nixon, referring to expected downward revisions to economic growth.
Nixon’s comments came after the Bureau of Labor Statistics revised its job growth figures downward to show that 818,000 fewer positions were created between March 2023 and March 2024.
This shocking downgrade means the Fed continued to raise interest rates in 2023 on the faulty assumption that the labor market was stronger than it actually was.
Although the Fed has repeatedly said it doesn’t foresee a recession, some officials have acknowledged that the odds of a downturn are rising.
Chicago Fed President Austan Goolsbee recently said that keeping interest rates elevated could increase the odds of a recession.
The “job market is slowing down,” said Goolsbee. “Do you want to tighten when the job market is cooling that much?” he asked.
However, like other Fed officials, Goolsbee doesn’t support rate cuts larger than the standard 0.25% move.
Fed officials will make their next interest rate decision on Sept. 18.
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