Federal Reserve 'Should Take The Foot Off The Brake' And Cut Rates, Economist Says

The Federal Reserve decided at its Wednesday meeting to keep the key interest rate between 5.25% and 5.5% while maintaining other policy interest rates and continuing to lower its bond holdings at a rate of $60 billion per month.

Bill Adams, chief economist for Comerica Bank, said the committee held rates steady and made a “dovish change” to its July statement to indicate that the time for rate cuts is near.

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“The most important change to the FOMC statement is where the June statement read, ‘the Committee remains highly attentive to inflation risks," the July statement reads, "The Committee is attentive to the risks to both sides of its dual mandate,” he said.

The unemployment rate is rising, the growth in payroll and wages is easing, and the inflation rate does not look too far from the Fed’s goal of 2%, the Comerica economist said.

“These data are tangible evidence that the U.S. economy is around the point where the Fed should take the foot off the brake,” he said.

The Fed’s July statement strongly indicates the Fed’s two mandates to achieve price stability and maximum employment “have come into balance,” but it has left enough ambiguity by not guaranteeing a Sept. 18 rate cut, said Quincy Krosby, chief global strategist for LPL Financial.

“The Fed seems particularly sensitive to the possibility that if they acknowledge a change in policy at the next meeting, and the downward trajectory of inflation stalls, or edges higher they will be unable to initiate the rate easing cycle,” she said.

The market is absolutely counting on rate cuts to begin in September, despite Powell’s persistent efforts to keep the Fed’s options open on doing so during the press conference after the FOMC meeting, said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

“The rally in stocks this afternoon began to pick up steam the more that Fed Chair tried to put the horse back in the barn throughout the press conference,” he said.

“Chairman Powell has tried to have his cake and eat it too.”

The FOMC could have cut rates at Wednesday’s meeting, but maybe Powell is looking for “more bang with his buck” at the September meeting, said Charlie Ripley, senior investment strategist for Allianz Investment Management.

“A lot can change from now until the September meeting and given the expected path of inflation and the reality that one rate cut is priced in, the impetus for a rate cut greater than 25 basis points is likely to build,” he said.

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