“Hey, Jay. Why don’t you just get started?” Asking for Bill Dudley.
With just days to go until the September FOMC meeting, the former New York Fed boss donned his pundit hat to make the case for an outsized, 50bps first cut from Jerome Powell at next week’s policy gathering.
Dudley, who pivoted hard to the rate-cut camp ahead of the July FOMC meeting, made a cameo in a market-moving piece from Wall Street Journal “Fed whisperer” Nick Timiraos, then went on the record at a forum in Singapore, where he (Dudley) said there’s “a strong case for 50, whether they’re going to do it or not.”
Timiraos single-handedly resuscitated the 50bps outcome, which was mostly left for dead after a warmer-than-expected read on core price growth earlier this week. A piece in the Financial Times likewise made it clear that the Fed remained open to an aggressive first move. The meeting’s “a close call,” the FT said.
Dudley’s logic is simple. The Fed says the risks around the dual mandate are balanced now — in “equipoise,” to employ John Williams’s needlessly baroque description. If that’s true, then policy’s far (far) too restrictive. Why, if you thought the risks were balanced, would you keep the real policy rate as far above r-star as it (may) currently be? That logic, Dudley opined, “says they should be going faster.”
As regular readers will kindly note, I’ve argued repeatedly (and as recently as Wednesday afternoon) that a 50bps move is preferable from a risk management standpoint. I still think that’s the case, but like almost everyone else, I assumed that door was closed after the CPI release and, less consequentially, after Thursday’s PPI prints which were also warm around the edges.
By appearances, the Committee is indeed cognizant of the irony inherent in slow-playing the path back down to neutral. As I wrote in the Daily a few evenings ago,
The Fed would, in my view, do well to remember that what got them into trouble with inflation in 2021 was a reluctance to act preemptively in the face of clear evidence that price growth was accelerating. Now, there’s clear evidence that the labor market’s decelerating and once again, the Committee looks indecisive and prone to foot-dragging. Some lessons from the biggest macro shock in at least a generation were learned. Others, it would appear, were lost to posterity.
Thankfully, my assessment was too pessimistic. Policymakers — Austan Goolsbee and Powell among them — are apprised that preemptive means preemptive. As Timiraos put it, “They don’t want to let slip through their grasp a soft landing.”
It’s never been clear to me why markets and Fed watchers think political considerations are more pressing around this month’s meeting compared to November’s. The idea that the 2024 US presidential election will be decided by 2:00 PM ET on November 7 is laughable — a riot. (Get it?) If I were Powell, I’d want to reduce the odds of having to move at that meeting at virtually any cost.
The last thing — the very, very last thing — this Fed needs is to find itself compelled to lower rates by 50bps in the middle of a dispute over what could easily be a narrow election win by Kamala Harris. If Harris is declared the winner and it’s close, Donald Trump and his supporters will challenge the results. Monetary policy doesn’t need to be anywhere near the front page during that prospective melee.
One way — the best way, even — to reduce the chances of that, is to cut 50bps now. If you do that, you can skip November, or at least have some hope of skipping it. And do note: 50bps next week isn’t incongruous with a dot plot that tips 100bps of total easing for 2024. Indeed, if the dot plot is destined to tip 100bps, I’d argue the most logical sequencing is in fact 50bps in September and then 50bps in December. Then you’re moving at a quarterly cadence at SEP meetings, and you avoid having to cut rates in the fraught hours around what’s likely to be another highly contentious US election.
If the Fed opts instead for 25bps next week, they’re rolling the dice not only on having to cut rates amid accusations that Democrats “stole” the presidency, but also of being viewed as hopelessly myopic in the event the September NFP headline underwhelms and/or is accompanied by downward revisions to the headlines from August and July. And that’s to say nothing of the possibility that the jobless rate renews its trek higher.
To me, this is a no-brainer. You gotta go with 50bps next week. You can always pause in November if the data holds up and, to reiterate, it’s vastly preferable if the November meeting is a non-event.
If the Committee’s concerned — and make no mistake, they are — about being castigated by Trump and his supporters for cutting rates next week, I can assure you that dynamic would be far more acute in the event the Fed ends up having to cut 50bps less than 48 hours after the election, which could very well happen if they let themselves fall behind the curve.
To be as clear as absolutely possible: The worst outcome is a scenario where the Fed cuts 25bps next week, the September jobs report is unfavorable, risk assets sell off in October, the US rates complex fully prices 50bps for November 7 and Powell finds himself compelled to deliver a super-sized rate cut just hours after a narrow Harris election win. The Fed should avoid that at virtually any cost.
Great read this morning. Love the reasoning. Kind of places your readers ahead in the coffee room.
Agree w/ reasoning and premise they should plan to sit out November and maybe even December. Watch from the sidelines. Fifty next week; don’t fight Timiraos.
The job market for the 24-55 age group is strong, showing no signs of a slow down or a recession. For that reason it could be a quarter point cut not 50.
Agree. The Fed put themselves here by not cutting 25 in July. Risk management is absolutely the correct description. If the cut proves too aggressive they can pause for awhile. If they under shoot they are playing catch up, and are behind the 8 ball. 50 is the right call.
As Mitch McConnell will clearly tell you….America’s government can only act from Tuesday to Thursday when Congress is in session and officials aren’t rushing back home, and not in election years.
Unless your team is in power, in which case superpowers of speed, size, scope, and audacity apply.
(Yeah, the Fed is not Congress…and Hamilton would NOT be amused).
I thought a 50 BP cut would raise the chance of a problem with the yen carry trade hence bad for equities (something mentioned in a prior article)?
I mean, that’s one theory. One market-based argument for not going the 50 route. But it’s one among an entire constellation of arguments for either side, and let’s not forget that in the end, there’s no “right” decision because none of us knows the future. In short: None of us — me, you, economists, Jerome Powell, none of us — has any idea what we’re talking about. Because it’s inherently unknowable. I think me and Socrates are the only two people in history willing to concede that we don’t actually know anything.
Understood. You may think you know little to nothing but you do a fantastic job of educating.?
The? At the end should’ve been a thumbs up.
I would argue that cutting 25bp in September and then another 25bp in November looks like the least politically driven path. If you cut in September then pause in November with the plan to restart again in December, surely that looks like you made a decision in November based purely on the election timing? Then again, I don’t think inflation is going to hit 2% and I see upside next year which will bring real rates down a bit. Plus, real rates aren’t exactly compared to anything but the 0% nominal rate world periods which shouldn’t be used as a benchmark, rather they should be viewed as the anomaly. I’m also curious what makes rates look restrictive right now? Markets certainly don’t suggest they are, growth is high, unemployment is low. I understand we need to look forward, but things seem to be holding up well even with rates at 5.50%. The Fed should and will cut rates, but doing so gradually with 25bp clips doesn’t seem like a bad idea from where I’m sitting.
Well, if they cut 25 next week and the macro-market evolves such that 50 is the “right” move in November, and that 50 comes 36 hours after Trump loses a narrow election to Harris, just watch Truth Social and the “X” accounts of GOP lawmakers to see why they should’ve gone with 50 in September. Or just read the conspiratorial musings of any “global strategists” not subject to Wall Street’s editorial compliance / review process. They’ll doubtlessly tell you all about the plot which, I’m sure, will involve Hunter Biden’s laptop somehow.
Hahaha! Fair point about Truth Social etc.
But also look how those same Wall Street strategists (I am one, but I’ve always subscribed to the view that the Fed ignores election timing) said the Fed had to cut back in March so as to start the process far enough away from the election so as not to look like they were trying to juice things up.
Monetary policy lags, and right now it lags significantly – the pass-through transmission has been severely impaired by ultra-low-for-so-long rates. Personally, I think Fed policy has had very little to do with the decline in inflation. Fiscal policy matters for the real world and consumer price inflation, monetary policy matters more for the financial world and asset price inflation. That is a simplification of course, but as a sweeping statement I think there is truth to it,