Former Federal Reserve economist Claudia Sahm stated that there is strong evidence supporting a 50 basis point rate cut. She pointed out that a rate cut would help achieve full employment and stabilize the unemployment rate. The market generally expects the Fed to cut rates by 25 basis points in September. However, economists believe that due to the current high federal funds rate, a larger rate cut is needed to avoid an economic downturn. Current economic data also support the necessity of easing policy
The entire Wall Street seems to be anticipating the upcoming rate cut by the Federal Reserve, but economists have differing views on the magnitude of the rate cut.
Most people agree that recent labor and inflation data suggest that a 25 basis point rate cut by the Federal Reserve in September is appropriate.
The rate cut by the Federal Reserve is aimed at stimulating the economy and will take action when signs of economic cooling are observed. The weak employment report in July was such a signal, as the sudden rise in the unemployment rate to 4.3% raised concerns about interest rates being too high. The downward revision of non-farm data on Wednesday further convinced investors that it is time for the Federal Reserve to ease its policy.
The CME Group's FedWatch tool shows that the market expects a 75.5% probability of a 25 basis point rate cut by the Federal Reserve in September.
However, former Federal Reserve economist Claudia Sahm pointed out in an interview on Tuesday that there is strong evidence supporting a 50 basis point rate cut.
She noted that doing so would help the Federal Reserve "recalibrate" and help stabilize the unemployment rate, which has become too low.
Sahm said, "Their mission is to achieve full employment. It's not 'no recession,' right? They should seek as little labor market weakening as possible to bring inflation down to target levels. I think the balance has shifted now."
Sahm added that a larger rate cut would also allow those who believe that the policy should have started cutting rates in July to see the Federal Reserve back on track.
Wharton School professor Jeremy Siegel agrees.
He said in an interview on Thursday, "I think they are taking risks they don't need to take. The sooner they cut rates, the lower the likelihood of an economic recession and significant economic slowdown."
Siegel pointed out that the current federal funds rate of 5.25% to 5.50% is too restrictive relative to the estimated neutral rate.
The neutral rate is the level at which borrowing costs no longer affect inflation and labor. Considering that inflation is nearing the Federal Reserve's target level, Siegel said that monetary policy has become unnecessarily tight.
He estimates the neutral rate to be 2.8%, much lower than the current federal funds rate. This estimate is based on the 10-year Treasury yield, which historically has been 100 basis points higher than the neutral rate.
Others on Wall Street have different views. On Wednesday, Apollo's Chief Economist Torsten Slok pointed out that given other evidence indicating that the economy remains strong, the Federal Reserve has enough time to adjust its policy.
For example, retail data suggests that consumers are still spending, and weekly initial jobless claims are also encouraging