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Markets Urge Fed to Start Cutting Rates: Why the Delay?

Markets Urge Fed to Start Cutting Rates: Why the Delay?

Washington DC —With the Federal Reserve hinting at potential interest rate cuts, market participants are increasingly eager to act.

In a press conference following Wednesday's Federal Open Market Committee (FOMC) meeting, Claudia Sahm, chief economist at New Century Advisors, questioned the Fed's delay. “What are they looking for?” she asked. “The bar is getting so high, and that doesn't make a lot of sense. The Fed needs to gradually begin that process of getting back to normal, which means gradually cutting interest rates.”

Sahm, known for the “Sahm ​​Rule,” which uses changes in the unemployment rate to signal recessions, has been outspoken about the need for the Fed to ease monetary policy to avoid an economic downturn. According to the rule, when the three-month average unemployment rate is half a percentage point above its 12-month low, the economy is in recession. Currently, unemployment is at 4.1%, approaching the threshold that would trigger the rule.

“The Fed's insistence on keeping short-term interest rates at their highest level in 23 years is jeopardizing the economy,” Sahm warned. “We don't need a weak economy to get that last bit of inflation. If the job is done on inflation, or we're on that glide path, the Fed can start to step aside.”

Fed Chair Jerome Powell responded to questions about the Sahm rule, describing it as a “statistical regularity” that may not apply in the current environment, given the strong labor market and moderating wage increases. “What it looks like is a normalizing labor market, job creation, and a pretty decent wage level that’s rising to a strong level but gradually coming down,” he said. “If it turns out to be more than that, then we’d be well positioned to respond.”

Despite the Fed’s dovish stance, markets are expecting aggressive rate cuts starting in September, including a quarter-percentage point cut. The projections also suggest cuts in November and December, with an 11% chance of a full-percentage-point cut by year-end, according to CME Group’s FedWatch indicator.

For now, the Fed has decided to keep its overnight interest rate in the range of 5.25% to 5.50%. The post-meeting statement acknowledged the gains on inflation, but stressed the need for “greater confidence” that inflation is returning to 2% before lowering rates.

Jeffrey Gundlach, CEO of DoubleLine, echoed concerns about the Fed’s hawkish stance. “I’ve been in this game for over 40 years and it seems to happen every single time,” he said. “All the other underlying aspects of the jobs data are not getting better. They’re getting worse. And so once you start getting to that upper level where they have to start cutting rates, it’s going to be more than they think.”

Gundlach expects the consumer price index to soon fall below 3%, making real rates, the difference with the federal funds rate, particularly high. “If you have a positive real interest rate, even one and a half percent, that would suggest you have 150 basis points of room to cut rates without even thinking about overdoing it,” he said. “I think they should have cut today, frankly.”

By Alice Rivers

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