Former Fed Official Urges Rate Cut in July

The Fed should lower rates, preferably at the meeting on July 31. This was reported by former New York Fed President William Dudley to Bloomberg.

The ex-official acknowledged that he previously believed in maintaining monetary policy to combat inflation, but due to new circumstances, he has abandoned his former stance.

The expert noted the impact of the Fed’s efforts to cool the economy.

Amid sustained high consumption by affluent households, less wealthy segments of the population have felt the impact of high credit rates. A decline in activity has been observed in the housing sector. The former official also noted signs of weakening investments.

Dudley mentioned a special indicator, the Sahm Rule, which signaled an impending recession. This metric accurately predicted economic downturns in the 1970s when the labor market was overheating.

Inflationary pressure, which concerned the Fed in previous months, is no longer as significant, judging by the annual PCE — 2.6% against the target of 2%, he noted. The same applies to wage dynamics, with growth rates weakening from a peak of 6% in March 2022 to 3.9% by the end of June 2024.

Dudley cited three reasons why the Fed is reluctant to cut rates on July 31:

1. The Fed fears making a mistake — due to the low base of last year, slowing inflation in the coming months will be challenging.
2. Fed Chair Jerome Powell may be seeking broad consensus on central bank actions — not all “hawks” are ready for a rate cut in September.
3. The Fed appears unconcerned about the risk of unemployment exceeding the threshold set by the Sahm Rule.

According to this metric, after a 0.5% rise in unemployment, a sharp 2 percentage point increase in the indicator followed, Dudley emphasized.

“It may already be too late to prevent a recession by lowering rates. But delaying now unjustifiably increases the risk,” concluded the former New York Fed President.

In July, Powell stated that the Fed would not wait for inflation to fall to 2% before beginning to ease policy.

Citi predicted the start of a Fed rate-cutting cycle at the September meeting.

Earlier, 10x Research reported expectations of Bitcoin returning to a growth trajectory amid easing inflation and the Fed approaching the start of policy easing.