Philly Fed president calls for September rate cut

Federal Reserve policymakers are getting more explicit in their calls for rate cuts, underscoring the central bank’s shifting priorities in recent months.

In an interview with CNBC, Philadelphia Federal Reserve Bank President Patrick Harker said the central bank should lower rates “methodically and signal well in advance.”

To that end, he said, “we need to start a process of moving rates down” beginning in September.

When asked about the size of rate cuts, Harker said, “Right now, I’m not in the camp of 25 or 50 [basis points]. I need to see a couple more weeks of data.”

Although Harker isn’t a member of this year’s Federal Open Market Committee (FOMC), his remarks are consistent with a growing number of central bankers who’ve identified the need to cut rates as soon as possible.

As the minutes of the July 30-31 FOMC meeting suggested, some policymakers supported cutting interest rates last month, but a “vast majority” said September would be a more appropriate date.

This means rate cuts are coming—the only question is whether the Fed will feel compelled to move beyond the standard 0.25% reduction.

At least two central bankers—Raphael Bostic and Austan Goolsbee—say jumbo-sized rate reductions are unlikely. But that could change following next month’s nonfarm payrolls report.

The labor market flashes another warning sign

One reason the Fed has been reluctant to cut interest rates is the apparent strength of the labor market. But after the recent batches of economic data, very few people would describe the job market as strong.

Earlier this week, the Bureau of Labor Statistics announced shocking revisions to nonfarm payroll data stretching back to early 2023. According to government economists, the U.S. economy added 818,000 fewer jobs than initially reported between March 2023 and March 2024.

According to economist David Rosenberg, the central bank hiked interest rates based on faulty data and has no choice but to course correct in the coming months.

“The fact that the Fed hiked the funds rate 75 basis points in the last leg of the tightening cycle when it mistakenly believed that nonfarm payrolls were 818,000 stronger from March 2023—March 2024 [...] should be incentive enough for Powell & Crew to start getting the ball rolling quickly” on rate cuts, Rosenberg said.

In Rosenberg’s view, a 0.5% rate cut in September “shouldn’t be ruled out,” regardless of what Goolsbee and Bostic have said recently.

A September rate cut would mark the central bank’s first reduction since the Covid emergency meeting in March 2020. It would also mark a significant departure from its policies over the past two years, which have focused on reducing inflation.

As Creditnews reported, the Fed has been slower to cut rates than other major central banks. The Bank of Canada, European Central Bank, and Bank of England have all moved to reduce rates this year.