Is the Fed making a policy mistake by cutting rates at this month’s meeting?

Note the definitive cadence. I’m prejudging the outcome of the September FOMC. As though a rate cut’s a foregone conclusion.

That’s because it is a foregone conclusion. A cut this month would’ve been guaranteed even without Stephen Miran on the Board. And Miran’s going to be on the Board.

I personally think it’s the right move. Indeed, regular readers will kindly recall that I supported a cut in July, not because I have anything to gain from ingratiating myself to an autocratic populist hell-bent on cheaper money, but rather because policy should be preemptive. At the risk of parroting a Trumpism, Jerome Powell has indeed been “too late” at key macro inflection points.

Of course, Powell was arguably too early — or at least too quick, and those aren’t necessarily the same thing — to cut this time last year, when the Fed panicked over the labor market only to see jobs growth recover.

Whatever the case, and while readily acknowledging that rates might in fact be close to neutral already (i.e., not 50-75bps restrictive, as conventional wisdom has it), there’s clear evidence of slower hiring. Take Wednesday’s JOLTS release for example. In addition to the closely-watched openings-to-unemployed ratio slipping below 1:1 for the first time in years, the data showed an outsized drop in openings for health care and social assistance positions. As one economist put it, “If you lose [the acyclical parts of the jobs market], you don’t really have much else to keep payroll growth with a plus sign in front of it.”

But… inflation. It’s sticky. Stubborn. And all synonymous thereof. At the same time, the overall growth impulse simply isn’t recessionary. The average of GDP and GDI (which the NBER uses for cycle dating) clocked in at 4% for Q2, and the Atlanta Fed’s popular GDPNow model is tracking 3% real growth for Q3 even after another lackluster ISM manufacturing release.

For those reasons, and a few more, one bank suspects a Fed that starts cutting rates this month is a Fed that risks a policy mistake. “If we are correct that economic activity is picking up and inflation is stuck above target, markets could interpret insurance cuts as a signal that the Fed is not willing to accept meaningful economic pain in exchange for ‘finishing the job’ on inflation,” BofA’s Claudio Irigoyen wrote, in a Wednesday note.

Irigoyen, who reiterated the bank’s house call for a hold at the September meeting (they’ll have to throw in the towel on that soon), said the Fed chances “higher long-run inflation expectations and risk premia” with a cut, which would in effect work at cross purposes with the Committee’s easing efforts “because monetary policy transmission happens primarily through long-end rates.”

In the same note, Irigoyen warned that “higher tariffs and immigration restrictions are a recipe for mild stagflation.” “With a supply-driven slowdown in the labor market, core inflation around 3% and the economy potentially re-accelerating, rushing to cut rates could translate into a policy error,” he said.

Take that for what it’s worth. Oh, and I should mention Larry Summers. On Wednesday, he said Trump’s encroachments on US monetary policy have put the Fed at “the foothills of a credibility crisis.”

“We are in completely unprecedented territory,” Summers told Bloomberg. Republicans, he added, are sitting idly by for “the wholesale politicization of the Fed.”