Economist Pours Cold Water On September Rate Cut: 'We Need To See Some Sustained Weakness'

No Signs Of Recession: The Federal Reserve may not cut interest rates until the November meeting, according to Brad Case, chief economist at Middleburg Communities, a real-estate investment and construction firm.

In an interview with Yahoo Finance, Case said, “There’s no particular reason to cut rates right. When data really show a softening economy, yes then there will be a chance to cut rates but we don’t have that kind of data yet.”

Consumer spending has remained strong, and wages and income have continued to increase, providing consumers with the money to spend, he said. “Until we start to see faltering in income growth or in consumption growth, there’s really no reason to think that the economy needs lower rates,” he added.

Data that are used for making forecasts about macroeconomic conditions are based on surveys and there is likely to be month-to-month bumps in the data, said Case. The July employment report was weaker than expected but there have been several times in the past an employment report that is weaker than expected followed by other employment reports that were are not so weak, he added.

“Before we start to take data like that as a sign of actual weakness throughout the economy, we need to see some sustained weakness in those indicators and we need to see it across a bunch of indicators,” Case said.

A recession, Case said, doesn’t mean that one part of the economy is weak. A recession means sustained strong weakness throughout the economy, both geographically across the country and throughout many or most sectors of the economy, he said, adding that “we we just don’t see that.”

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On CME FedWatch Tool: Case also shed light on the CME FedWatch Tool, which is based on futures trading. The tool now projects a 51.5% probability of a 25-basis-point cut at the September meeting, which would take the rate from the current 22-year high of 5.25%-5.50%. The futures market is pricing in a 48.5% probability of a 50-basis-point cut.

Case said the tool is based on investment activities by people, who have important reasons for hoping for a cut in interest rates. “It’s not an infallible tool,” he said.

It is only prudent to look at a broad range of indicators and look for multi-month trends, the economist said. “My recession probability forecasting model has increased in probability but only to 41%. “The probability of recession over the next year has increased but it hasn’t become very strong,” he said.

Rate Outlook: Between now and November, there will be enough data that suggests that the Fed should not continue to keep rates high and because of that the Fed will start to reduce rates in November, Case said.

The betting market is predicting a 95% chance of a Fed rate cut in September, according to data available on Polymarket. The probability is an even higher 97% for a cut in November and 98% for December.

The next meeting of the Fed’s monetary policy-setting committee – the Federal Open Market Committee, is scheduled for September 17-18. Before the meeting, the central bank may have on hand two consumer price inflation reports and a job market data to assess.

The July consumer price inflation report is due on Wednesday, with economists, on average, forecasting the annual rate of the core consumer price inflation to tick down from 3.3% to 3.2%.

The iShares TIPS Bond ETF TIP, an ETF tracking the investment results of an index composed of inflation-protected U.S. Treasury bonds, ended Friday’s session up 0.26% at $108.20, according to Benzinga Pro data.

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