Former Federal Reserve official: Rate cut likely in September, but not the start of a full easing cycle
Former Federal Reserve officials have indicated that given recent developments in inflation, the Fed is likely to cut interest rates in September, but this does not mean the beginning of a comprehensive rate-cutting cycle. He pointed out that due to high fiscal deficits and persistently high energy prices, the Fed will make policy decisions at each meeting. The president of Adney Research believes that the Fed will cut rates once in September, but there may not be any further cuts afterwards. He expects the trading range of US bond yields to be between 4% and 5%. The US economy appears to be doing quite well, and inflation is moving in the right direction, leading to questions about the rush to lower interest rates
Former Dallas Fed President Kaplan said that given the recent progress in inflation, the Fed is likely to cut rates in September, but this is unlikely to mark the beginning of a full rate-cutting cycle.
Kaplan, who left the Fed in October 2021 and is now Vice Chairman of Goldman Sachs, said on Thursday: "The path for the Fed to cut rates in September is very clear. I think they are very likely to cut rates again in December."
He told Bloomberg TV in Tokyo: "This does not mean that the Fed will start a full rate-cutting cycle, as the fiscal deficit remains high and energy prices are still high. Policy decisions will be made at successive meetings."
Before Kaplan's remarks, several Fed officials led by Powell have indicated in recent weeks that the Fed is making some progress towards its target of lowering inflation to 2%, but they have been vague about the timing of rate cuts.
US second-quarter inflation slowed, with the core Consumer Price Index (CPI) rising only 0.1% month-on-month in June, the smallest monthly increase since 2021.
CME's FedWatch tool shows a 100% probability of the Fed cutting rates by 25 basis points in September.
Ed Yardeni, President of Yardeni Research, also agrees that the Fed will cut rates in September, but he is not convinced that there will be more rate cuts afterwards.
He pointed out, "The federal funds futures market basically expects five rate cuts in the next 12 months. The market has been wrong before, and it may be wrong again."
He believes that the market will be "skeptical" about the possibility of rate cuts next year. Meanwhile, as the Treasury plans to issue a large amount of bonds and bills, bond traders are struggling to cope with supply issues, so he expects the trading range of US bond yields to be between 4% and 5%. "I don't think it will fall below 4%, although some people firmly believe that this will happen," he said.
Yardeni pointed out that the US economy "looks pretty good" and inflation is "moving in the right direction." "So, why rush to lower rates?" he questioned.
He said, "Until recently, I thought the Fed's strategy was to wait until inflation actually fell to 2% before cutting rates, and then wait a few months. Now they seem to be changing the rules, saying, 'Well, we're almost there'... My concern is that if they lower rates when it's not necessary, the market will collapse."