Why the Fed might need to “take action” and cut rates

The Federal Reserve has only planned one interest rate cut this year. Some economists worry that the latest round of monthly data won’t be available soon enough.

On Tuesday, retail sales data for May showed that the pace of consumer spending was slowing compared to last year, easing concerns about an overheated economy in the fight against inflation. In the labor market, while job creation last month was higher than expected, the unemployment rate reached 4%, its highest level since January 2022. Overall, the surprise index Citi’s economics, which measures how much data is better than expected. , hovers near its lowest level in more than a year.

At the same time, inflation data for May turned out to be more promising than expected. The overall consumer price index (CPI) rose at its slowest pace since July 2022. Combining this data with a reading of wholesale prices in May, economists estimate that the preferred inflation indicator of the Fed’s personal spending index (PCE) rose to its lowest level. the slowest pace of the year in May.

With inflation falling and the economy slowing, Renaissance Macro’s Neil Dutta believes it’s time for the “Fed to step up to the plate” and start cutting interest rates soon. According to Dutta, this will help protect the Fed’s other mandate besides price stability: maximum employment.

“The dynamics behind core inflation will likely continue to weaken from here on,” Dutta told Yahoo Finance. “Then I think for the Fed, tradeoffs with the labor market become a little more onerous.”

Dutta points out that any sign of weakness in the labor market has so far been seen as a sign of rebalancing after the pandemic destabilized supply and demand.

Federal Reserve Chairman Jerome Powell acknowledged this.

“We are seeing a gradual cooling, a gradual evolution towards a better balance [in the labor market]”Federal Reserve Chairman Jerome Powell said June 12 after the central bank’s latest policy meeting. “We’re watching the situation carefully for signs of something more than that, but we don’t see it truly not.”

But what does it matter Dutta, and the Goldman Sachs economic team, that’s where the data usually leaves from here. The rate of job creation is now in line with pre-pandemic levels. If it were to continue to fall, a rise in the unemployment rate would generally accompany the downward trend, Dutta said, referring to the Beveridge curve.

As the work of the Federal Reserve highlightspoints on the Beveridge curve moving further along the right axis (as shown in the graph below highlighted in red) would result in a decreased chance of a soft landing and, eventually, a recession.

“I just don’t think the Fed wants to push the weakening of labor demand even further,” Dutta said.

He added: “The Fed knows that. It’s not like the risk at this point is that the unemployment rate will fall unexpectedly. The more likely outcome is that it’s stable or that it increase.”

To be clear, Dutta and others…

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