Markets are now firmly pricing in a September rate cut in the U.S., but Carl Weinberg, chief economist at High Frequency Economics, believes there are good reasons the Fed might not cut rates then.
According to data from the London Stock Exchange Group (LSEG), money market pricing for a rate cut at the Fed's fall meeting rose from around 70% to over 90% after the weaker-than-expected report on the consumer price index. This was further bolstered by Fed Chairman Jerome Powell's comments earlier this week that there were risks of keeping interest rates too high for too long, which was interpreted by analysts as "moderately dovish".
However, Weinberg pointed out in an interview with the European Financial Forum on Friday that there are also risks in easing monetary policy, which casts a shadow on the prospect of rate cuts.
“Powell was very clear in his testimony this week that inflation indicators and the overall economy are moving in the direction we would like them to be moving,” Weinberg said. “He said that includes unemployment around 4%, inflation moving toward 2%, and economic growth ‘roughly’ at potential.”
Weinberg continued: “But he also implies that if the economy is at full employment, inflation is where we want it, the economy is growing nicely, why would we change anything? Why would we want to interfere with the situation we have now? In that case, why would you want to cut rates? There was noise, anecdotes and data supporting a rate cut in the September meeting. But there was a cloud hanging over that decision as well.”
Weinberg added that while a September rate cut now looks likely, a lot could change between now and the Fed’s Sept. 19 meeting.
There are two more CPI reports to come before that. The Fed next meets in late July, with markets pricing in just a 5% chance of a rate cut.
US inflation falls, but still higher than UK and eurozone
While inflation has peaked lower in the U.S. than in many other major economies over the past three years, it has also fallen more slowly, leaving the Fed behind on its path of monetary policy easing.
Central banks in the euro zone, Switzerland, Sweden and Canada have all cut rates this year, while the Bank of England's August decision is a delicate balancing act.
Article forwarded from: Jinshi Data
