Fed may not need 50 BPS cut due to 'booming' market, weak dollar
Federal Reserve officials are expected to cut interest rates by 25 basis points at their September FOMC meeting on Wednesday. After being confirmed by Senate lawmakers, recent Fed Board appointee Stephen Miran will be present for the US central bank's monetary policy meeting.
Harvard University professor Jason Furman joins the Morning Brief to comment on the risks of cutting rates in this economic environment and elevated inflation. Furman is also the former chairman of the Council of Economic Advisors (CEA) under the second Obama administration (2013 to 2017).
Also catch Yahoo Finance's explainer on the Fed's dot plot.
To watch more expert insights and analysis on the latest market action, check out more Morning Brief.
I know you're on the record saying that the Fed should indeed cut today. Um, but is there a risk to cutting as well, given the backdrop?
Um absolutely. I mean, we have an inflation rate that is uh core inflation that's basically 3% and rising. Um some of that is tariffs, um but it's not all tariffs. So four straight years of inflation above target and while the Fed has a dual mandate, it's most important a mandate is inflation. So, I think they should cut, but there are, you know, unfortunately, they still needs to be nervous about both sides of the mandate.
And Jason, I'm always interested in the so-called transmission mechanism, right? When they cut, how does that make its way through to financial conditions, to the economy? We've had guests come on and say, financial conditions are already pretty loose right now. As you recently wrote and as many economists are saying, the labor problem is at least substantially a supply problem. Does cutting rates do anything for that?
Yeah, no, it can't do anything about labor supply, that's related to our immigration. Um it can't really do anything about stagflation, which is related to our tariffs. Um but rates still probably are above neutral. We don't really know where neutral is, but it's a bit above them. Um the unemployment rate is now above what the Fed's um long-term expectation for a neutral unemployment rate is. and so some recalibration makes sense. But um but you're right. I mean, one reason that I do not think they need to think about 50 basis points is you have a booming stock market, um a weak dollar, both of those are expansionary. Um long-term rates have been coming down, that's expansionary. So there's a lot of expansion um in the pipeline and that's before even talking about fiscal policy where what the deficit's likely to increase again next year.
I I'm also curious about the sort of drama that has been surrounding the Fed, right? Lisa Cook will be there today. So will Stephen Myron after he was confirmed. And I mean these are human beings, right? You have to imagine that there's going to be a little bit of tension or, you know, that they can't ignore all of this is going on. How how do you think that affects the sort of decision-making process?
I think the Fed's been good about not letting the drama get to itself. I know some people are like, uh don't cut rates because it'll look like you're in the pocket of Trump. Other people are like, oh, make sure you cut rates, otherwise he'll take away your independence. I think they're ignoring both sets of those advice and just doing what they would do um if there weren't a lot of noise um out there. Um there is some drama in terms of these picks um and the like. I don't like what President Trump did to Lisa Cook, but at least the courts are the ones who are making the decisions right now, and everyone is agreeing to abide by the courts. and I hope they continue, um, you know, to make the types of decisions they've been making. Um but the most important is that everyone agrees, you know, where who decides the law in this case. There's no debate about that.
