Half-point rate cut in the cards? Ex-Fed governor says the central bank 'will go big now’

According to Bill Dudley, “short-term interest rates remain far above neutral”
By Sam Bourgi
•
17 September 2024
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Former Federal Reserve governor Bill Dudley believes the central bank has the opportunity to deliver a bigger and bolder interest rate cut this week.

In a Bloomberg op-ed, Dudley, who served as the New York Fed president from 2009 to 2018, said the central bank’s dual mandate of price stability and full employment "has come into much closer balance."

This suggests that interest rates should be “neutral,” or at a point where they neither restrain nor boost economic activity. “Yet short-term interest rates remain far above neutral," said Dudley.

"This disparity needs to be corrected as quickly as possible,” he added.

In his view, one way to bridge this gap is to deliver a half-point interest rate cut on Sept. 18. Although policymakers were hesitant about jumbo-sized rate cuts, “I expect the Fed will do 50,” said Dudley.

“[A] bigger move now makes it easier for the Fed to align its projections with market expectations, rather than delivering an unpleasant surprise not warranted by the economic outlook,” he said.

In a surprising twist, futures markets suggest Dudley’s prediction isn’t so far-fetched after all. In fact, it’s now the base case expectation for the next meeting.

The case for a half-point cut grows

According to CME Group’s FedWatch Tool, the odds of a 0.50% rate reduction this week have grown to 59%, up from 30% one week ago.

The Fed’s decision this week “looks more difficult than it should be,” wrote Greg Ip, The Wall Street Journal’s chief economics commentator.

As reasons why the Fed should consider aggressive rate cuts, Ip pointed to cooling inflation and a slowing labor market. “A recession now serves no useful purpose,” said Ip.

As Creditnews reported, headline inflation fell to more than three-year lows in August. Other inflation metrics, such as the core Personal Consumption Expenditures index, are also edging closer to the Fed’s mandated 2% goal.

On the labor market front, the Fed clearly overestimated the strength of hiring during the last leg of its rate-hike cycle in 2023.

This became apparent last month when the Bureau of Labor Statistics revised its job numbers down by a staggering 818,100 positions between March 2023 and March 2024.

Meanwhile, the Sahm Rule recession indicator, which tracks changes in unemployment, flashed a recession signal in July. So, while evidence of a recession hasn’t fully materialized, “waiting for that evidence is tempting fate,” said Ip.

It remains to be seen how changes in inflation and hiring will impact the Fed’s projections. In addition to its policy statement on Sept. 18, the FOMC will release updated projections for GDP, unemployment, and interest rates.

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