EXCLUSIVE: The Fed Should Cut Interest Rates Using Proven Fiscal Rule, Economic Expert Says

Blu Putnam, the former chief economist at the CME Group Inc CME joined Benzinga's PreMarket Prep Wednesday morning to help dissect April's inflation report.

The CPI numbers showed lower-than-expected inflation growth in the previous month, helping spark a rally in the S&P 500 Index Trust SPDR and the overall market.

Putnam argued that based on the Taylor Rule the Federal Reserve should start cutting interest rates. Hotter inflation reports in previous months have shifted the interest rate outlook, with initial market projections of four to five interest rate cuts in 2024 dropping to one to two.

What Is the Taylor Rule? The Taylor Rule, named after Stanford University economist John Taylor, is a formula that helps determine whether the central bank should cut or raise interest rates based on inflation and economic growth. 

"The Taylor rule says that the Fed has a dual mandate they have to trade off unemployment and inflation," Putnam said. "The Taylor rule basically takes unemployment at its trend rate… at unemployment we're kind of checking the box, we're not going up and it's not going down. Inflation has come down a lot and it's below the federal funds rate, so you know the Taylor rule says sure the unemployment rate is low but inflation has come down well below Federal fund rates, so let's cut rates."

Putnam went on to say that a few small interest rate cuts shouldn't have a drastic impact on inflation. Right now, CME's Fed Watch Tool shows that it's likely that the Fed cuts interest rates by 50 basis points by the end of the year. 

Despite April's lower inflation report reigniting hopes that the Fed will indeed be able to cut multiple times this year, many interest rate-sensitive sectors lagged the overall market in Wednesday's session. For example, the Invesco Solar ETF TAN and the SPDR S&P Regional Banking ETF KRE were in the green but were underperforming the S&P 500 Wednesday afternoon. 

To watch Putnam's full interview on PreMarket Prep, click here.

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Image: BluPutnam/Linkedin DenysNevozhai/Unsplash