EY: The Fed is cutting rates responsively, not proactively

Gregory Daco, chief economist at Ernst & Young, said the Fed was cutting rates “reactively” rather than proactively, noting that “Powell acknowledged that the Fed might have cut rates in July if it had seen July employment data first.” Data released two days after the July meeting showed the unemployment rate rose to 4.3%, raising concerns that the Fed waited too long to act. “Fed policymakers must adopt a strong forward-looking framework and abandon data dependence, which unfortunately they have not done so far.” Another challenge for Powell is that Wall Street is expecting more future rate cuts than Fed policymakers predict. This week, policymakers estimated two more 25 basis point rate cuts by the end of 2024 and four more in 2025. The Fed’s rate-setting committee was almost evenly divided on the number of additional rate cuts expected this year, with seven policymakers supporting another 25 basis point cut by the end of the year and nine members supporting an additional 50 basis point cut. Two policymakers did not expect any more rate cuts. This path means that while several officials may support a 25 basis point rate cut this month, they would choose a 50 basis point cut to avoid further deterioration in the job market.