Fed Policy

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-

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

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.

By delaying rate cuts in search of certainty, the Fed risks being behind the ball. The FOMC should actively keep the option of a 50 basis point cut on the table between now and the September meeting.

While Fedspeak has certainly shifted during the past few weeks, few members are itching to cut rates at the July meeting.

Fire prevention—rather than fire fighting—is a better approach to risk management when it comes to the labor market. When it comes to unemployment risk, the Fed should be proactive and preemptive, not reactive.