Fed Policy

We will be hoping for two things at the September meeting this week: a 50 bps cut and minimal upwards revisions to the unemployment rate projections in the Summary of Economic Projections (SEP).

Our new baseline is a 50 bps cut with a total of 75 bps of cuts in the SEP for 2024. It’s a close call but we think a 50 bps cut is more likely than a 25 bps cut. We think a 50 bps point cut is the right move.

Even though today’s report gave back some of the weakness in the July household survey, the reversion was slight. The August report meets the conditions we laid out yesterday for a 50 bps cut in September to play catch-up.

We see two individually sufficient conditions for the Fed to proceed with a frontloaded interest rate cut in September above 25 basis points: either (1) the unemployment rate is 4.2% or above, or (2) the prime-age 25-54 employment rate declines in both month-over-month and year-over-year terms. Back when we

Thanks to outperforming supply-side dynamics, the labor market has already rebalanced. At the same time, income growth is still decelerating and the lagging bits of the inflation overshoot are finally normalizing as a result. The August jobs report should shape how much and how fast the Fed should be cutting,

When it comes to the Fed policy today, the question of whether or not these rules are good at telling us if we’re currently in a recession is almost besides the point.

A 50 basis point cut should be the base case after today and further slowdowns in the remaining jobs and inflation reports between now and the September meeting may bolster the case for more drastic action this year.