'Why wait until September?'—Economists mount pressure on Fed to cut rates immediately

The Fed should end the waiting game and cut interest rates immediately, writes economist and Wall Street Journal editor Aaron Back. “Why wait until September?” Back asks.

To support his argument, Back points out that core inflation—a measure that strips away volatile food and energy prices—has “either slowed or stayed the same for 16 straight months.”

That context makes the “market’s freakout over a supposed inflation rebound earlier this year look decidedly overblown,” he says.

The Fed will hold its next meeting on July 30-31, but there's a 91% chance that rates will remain unchanged, according to the CME FedWatch.

Expectations for the September meeting are the polar opposite, with markets pricing in an 89% chance of a rate cut—thanks to multiple reports of slowing inflation.

Fed Chair Jerome Powell testified before Congress last week, signaling that consumer prices were falling, the job market was cooling, and economic growth was slowing.

Because of that, “it is unclear what catalysts there could be on the horizon to drive a resurgence in inflation,” Back writes.

Back isn’t the only economist calling on the Fed to cut rates immediately.

Queens’ College president Mohamed El-Erian believes the U.S. economy is slowing faster than expected and that the Fed should respond now to dodge a recession.

What’s really keeping Powell up at night

Powell’s congressional testimony provided context behind the Fed's decision-making process, highlighting that a soft landing is its top priority.

A policy that gives the Fed the best chance of slowing inflation without causing a recession is “the thing I think about in the wee hours,” he said.

Although Powell didn’t admit it, safeguarding the Fed’s credibility is also important.

In 2021, the Fed told Americans not to worry about inflation because it was only temporary. Fast forward one year, inflation hit a 40-year high of 9.1%, forcing the Fed to hike interest rates 11 times.

With inflation moderating again, the focus appears to be shifting away from consumer prices to unemployment, which has ticked up lately.

According to the Bureau of Labor Statistics, the national unemployment rate reached 4.1% in June, compared to a low of 3.4% last year.

“The labor market is experiencing a non-recessionary cooling (as it has been since the spring of 2022),” said Guy Berger, director of economic research at the Burning Glass Institute.

“We’re not at the tipping point into recession yet, but I don’t have a lot of confidence about the distance from that tipping point.”

If unemployment keeps rising, there's a good chance it will trigger a recession signal as soon as this summer, according to the Sahm Rule.