Federal Reserve Chairman Jerome Powell arrives for a news conference following a Federal Open Market Committee meeting at the William McChesney Martin Jr. Federal Reserve Building in Washington, D.C., July 31, 2024.
Andrew Harnick | Getty Images
As the Federal Reserve begins to signal its stance on rate cuts, some in the market are looking forward to dinner.
“What are they looking for?” Claudia Sham, chief economist at New Century Advisors, told CNBC shortly after the Fed’s meeting on Wednesday. “The bar is pretty high, and that doesn’t make any sense. The Fed needs to gradually bring that process back to normal, which means gradually lowering rates.”
Sahm, known for formulating the Sahm Rule, which uses changes in the inflation rate to gauge when a recession is about to occur, has argued that central banks should begin to ease monetary policy to avoid dragging the economy into a recession. The rule states that an economy is in a recession when the three-month average of the unemployment rate is 0.5 percentage points above its 12-month low.
Unemployment, at 4.1 percent, is just shy of triggering the rules, and Sahm said the Fed’s insistence on keeping short-term interest rates at their highest levels in 23 years is putting the economy at risk.
“We don’t need a weak economy to squeeze the last bit out of inflation,” she said. “We don’t need to be afraid of a good economy. If the inflation job is done or we’re on a glide path, that’s fine. The Fed can start to back off.”
Asked about the Sahm Rule at a press conference after the meeting, Federal Reserve Chairman Jerome Powell said this time it was a “statistical regularity” that was not necessarily true, as the jobs situation remained strong and wage growth was slowing.
“The labor market is normalizing, jobs are being created, wages are rising to a pretty decent level and then they are gradually coming down,” he said. “If … something more emerges, we are well prepared to respond.”
A cautious approach
However, the market expects rates to be cut more aggressively, with a 0.25 percentage point cut starting in September, the first such move since the early days of the coronavirus crisis.
The market expects a rate cut in November and December, with about an 11% chance of a 1 percentage point cut in the federal funds rate by year-end, according to the FedWatch indicator for the CME Group’s 30-day federal funds futures contract.
Rather than take its foot off the brakes, the Fed said Wednesday that it would keep its overnight borrowing rate in a range of 5.25% to 5.50%. In a statement after the meeting, it cited progress on inflation, but policymakers on the interest-rate-setting Federal Open Market Committee repeatedly stressed that they would be prepared to cut rates only if they had “greater confidence” that inflation was returning to 2%.
Jeffrey Gundlach, CEO of DoubleLine, also believes the Fed’s tight stance on rates risks a recession.
“I’ve been in this game for 40-plus years, and it seems to happen every time, so that’s exactly what I think,” Gundlach told CNBC’s Scott Wapner on “Closing Bell” Wednesday. “Every other fundamental aspect of the jobs data is not getting better. It’s getting worse. So when they start getting to that upper bound where they have to cut rates, it’s going to be worse than they think.”
In fact, he thinks the Fed could cut rates by 1.5 percentage points next year, a pace that would be more aggressive than policymakers had anticipated when they last updated their “dot plot” of individual forecasts.
Gundlach expects the consumer price index to soon fall below 3 percent, which would push real interest rates, or the difference between them and the federal funds rate, higher, especially.
“If real rates are positive even at 1.5%, that means there’s 150 basis points of room to cut rates without thinking it’s excessive,” he said. “Frankly, I think they should have cut today.”
