September rate cut would be costly mistake, economist warns
Cooling inflation has given the Fed the justification to cut interest rates in September, but that doesn’t mean it should, warned economist Carl Weinberg.
In an interview with CNBC, the chief economist at High Frequency Economics said the Fed’s interest-rate policy was clearly working, which is why policymakers shouldn’t tinker with it right now.
In his congressional testimony on July 11-12, Fed Chair Jerome Powell acknowledged that “inflation metrics and the economy in general are moving in the way that we kind of like,” Weinberg said.
But that doesn't mean a rate cut is necessary. “Why would we want to change anything if the economy is at full employment, with inflation where we want it to be, and it’s growing nicely?" Powell asked.
"Why would we want to tinker with what we have right now? Why would you want to cut rates under those circumstances?” he added.
Although data support a rate cut in September, Weinberg said a lot can change between now and then.
For starters, there are two more Consumer Price Index (CPI) readings before the all-important September meeting, not to mention the July 30-31 FOMC meeting.
Rate cut bets grow after the latest data
Despite Weinberg’s warning, Wall Street is more convinced than ever that the Fed will cut rates. According to CME Group’s FedWatch Tool, there’s a higher than 95% chance of a September rate cut.
That renewed confidence stems from multiple reports showing that inflation is moderating again.
As Creditnews reported, U.S. CPI fell to a 3% annual rate in June, the lowest in three years. Meanwhile, the Fed’s preferred core Personal Consumption Expenditures (PCE) index eased to a 2.6% annual rate in May.
At the same time, the national unemployment rate has crept up to 4.1%, which is the highest since November 2021.
Several economists have warned that the U.S. economy is slowing more than expected, which is why the Fed should begin its cutting cycle sooner rather than later.
They point to sluggish consumer spending and a surprise contraction in the service sector as reasons for the Fed to be on high alert.
For these reasons, analysts at Citi Research expect the central bank to slash interest rates in eight consecutive meetings, beginning in September. If their forecast pans out, the federal funds rate will be at 3.5% by July 2025.
“A continued softening of activity will provoke cuts at each of the subsequent seven Fed meetings, in our base case,” the Citi analysts wrote.
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