Federal Set Chairman Jerome Powell arrives to speak at a news conference following a Federal Open Market Committee caucus at the William McChesney Martin Jr. Federal Reserve Board Building on July 31, 2024 in Washington, DC.
Andrew Harnik | Getty Simulacra
If the Federal Reserve is starting to set the table for interest rate reductions, some parts of the market are getting impatient for dinner to be look after the needs ofed.
“What is it they’re looking for?” Claudia Sahm, chief economist at New Century Advisors, said on CNBC just after the Fed concluded its conclave Wednesday. “The bar is getting set pretty high and that really doesn’t make a lot of sense. The Fed needs to start that system back gradually to normal, which means gradually reducing interest rates.”
Known for formulating the Sahm Prevail that uses changes in the inflation rate to gauge when recessions occur, Sahm has been clamoring for the important bank to start easing monetary policy so it doesn’t drag the economy into recession. The rule states that when the three-month mediocre of the unemployment rate is half a percentage point above its 12-month low, the economy is in recession.
The 4.1% jobless level is at most a short distance from triggering the rule, and Sahm said the Fed’s insistence on holding short-term interest rates at their highest straight in 23 years is endangering the economy.
“We don’t need a weak economy to get that last little bit out of inflation,” she said. “We do not have planned to be afraid of a good economy. If the inflation job is done, or we’re on that glide path, it’s OK, the Fed can start stepping aside.”
Asked nearby the Sahm Rule during his post-meeting news conference, Fed Chair Jerome Powell called it a “statistical regularity” that doesn’t willy-nilly hold true this time around as the jobs picture remains strong and the pace of wage gains decelerates.
“What it looks akin to is a normalizing labor market, job creation and a pretty decent level of wages going up at a strong level but coming down piece by piece,” he said. “If it turns out to … show something more than that, then we’re well positioned to respond.”
Discreet approach
Markets, though, are pricing in an aggressive path for rate cuts starting in September with a quarter interest point reduction, which would be the first since the early days of the Covid crisis.
After that, superstores expect cuts in November and December, with an about 11% probability assigned to the equivalent of a full percentage bottom lopped off the fed funds rate by year-end, according to the CME Group’s FedWatch gauge of 30-day fed funds futures contracts.
Preferably of starting to take its foot off the brake, the Fed on Wednesday said it is keeping its overnight borrowing rate in a range between 5.25%-5.50%. The post-meeting proclamation did note progress made on inflation, but also reiterated that policymakers on the rate-setting Federal Open Market Panel need “greater confidence” that inflation is heading back to 2% before they will be ready to reduce rates.
DoubleLine CEO Jeffrey Gundlach also thinks the Fed is risking recession by holding a hard line on rates.
“That’s accurately what I think because I’ve been at this game for over 40 years, and it seems to happen every only time,” Gundlach said, speaking to CNBC’s Scott Wapner on “Closing Bell” on Wednesday. “All the other underlying sides of employment data are not improving. They’re deteriorating. And so once it starts to get to that upper level, where they fool to start cutting rates, it is going to be more than they think.”
In fact, he thinks the Fed could end up slashing fees by 1.5 percentage points over the next year, a pace that’s more aggressive than the policymakers charted when they survive updated the “dot plot” of individual projections.
Gundlach figures that the consumer price index will be below 3% in two shakes of a lambs tail, making real rates, or the difference with the fed funds rate, particularly high.
“If you have a positive real attract rate that’s even one and a half percent, that would suggest you have 150 basis points of range to cut rates without even thinking that you’re being excessive about it,” he said. “I think they should be subjected to cut today, quite frankly.”