The Federal Reserve is signaling a possible 0.25% rate cut next month as the balance of inflation and employment risks shifts. Tariff-related inflation risks have so far remained muted despite earlier concerns, while labor-market indicators show a slowing in new job growth and elevated borrowing costs are weighing on real estate. President Donald Trump has pushed for interest rate cuts. Some Federal Reserve officials and economists warn that cutting rates now could reduce policy tools in a major downturn. Economists offer differing views: some favor a modest cut now, while others insist rates should be set by market forces given high household and corporate debt.
The latest data show a significant slowdown in new jobs, and high interest rates are weighing on real estate. Many of us feared that tariffs would lead to much higher inflation. That hasn't happened yet, though it still could. Given the current balance of risks, I would like to see the Fed lower its main interest rate by 0.25% at the next meeting. I would wait for more data after that before deciding on the next step.
Provided there are no major surprises in inflation and jobs data. The main rationale for waiting is potential price effects from tariffs, but that concern is overstated. Imports account for just 11% of U.S. GDP and if tariffs are passed through to prices, it is a one-time effect. A 25-basis-point cut will have only a marginal effect on the economy and keep the Fed from being behind the curve should current employment and inflation trends continue.
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