Markets think the Fed is certain to keep rates steady this week. Why 3 experts say that could be a mistake.
Markets see the result of Wednesday's Federal Reserve meeting as largely a foregone conclusion, predicting a more than 99% chance that the central bank will keep rates steady, but some fear the central bank is going to wait too long to make its move.
Relatively subdued inflation prints in recent months are giving the Fed reason to be optimistic, but inflation hasn't fallen quite enough for it to cut borrowing costs as officials await more data that could impact prices.
Tariff worries are still lingering, and now, concerns about the cost of crude oil due to the Israel-Iran conflict have added another reason for the Fed to worry about the path of inflation.
Yet, some strategists are wondering if the Fed is making a mistake, similar to what some interpreted as an error last September when it cut rates by 50 basis points. At that time, critics said the jumbo cut was the result of officials playing catch-up.
Powell is also under political pressure to cut rates, as President Donald Trump has repeatedly criticized Fed chairman Jerome Powell and threatened to fire him. Just last week, the president called Powell a "numbskull" for not lowering interest rates.
The market is pricing in one to two rate cuts in 2025 and two cuts in 2026. Here's why some market experts are raising concerns about the Fed's hesitation to loosen monetary policy.
Neil Dutta, head of economics, Renaissance Macro Research
Dutta 's not expecting a re-acceleration in inflation, but that doesn't mean the outlook for the economy is rosy. Dutta's biggest concern is the labor market, which has shown signs of weakness and rising unemployment. Jobless claims are rising, hiring rates are slowing, and wages are remaining stagnant.
Back in March, the Fed predicted that the unemployment rate would be 4.3% by the end of 2026. Now, market consensus sees unemployment rising to 4.6%. A growing unemployment gap could pose a serious threat to the economy, and Dutta believes the Fed is not paying enough attention to it.
"Based on the unemployment rate, they should be penciling in more cuts for 2026," Dutta said on a webinar Monday.
Dutta's less concerned about a resurgence in inflation due to household budget constraints. Home prices have come down, meaning that Americans' net worth is falling as well. This tends to result in higher savings rates and less spending, keeping inflation subdued.
"The Fed is essentially conditioning itself to be behind the curve right now," Dutta said.
Emily Roland and Matt Miskin, co-chief investment strategists, Manulife John Hancock Investments
Tariff uncertainty is clouding the rate cut outlook for this year, Roland and Miskin believe.
If it weren't for inflation concerns surrounding the trade war, the co-chief investment strategists believe that the Fed could already be initiating cuts, as inflation has been steadily cooling over the last several months.
But for now, the Fed is in wait-and-see mode as the central bank monitors for signs of a tariff-induced inflation spike.
Roland and Miskin predict that the Fed will most likely wait until its Jackson Hole meeting in August before giving a clearer signal about its plans to cut rates this year. For Wednesday, they expect the Fed to lower its core PCE inflation estimate but keep its real GDP estimate unchanged.
The strategists see some level of concern in the labor market: initial jobless claims were 248,000 for the week ending June 7, and continuing jobless claims are continuing to rise.
"It is hard for the Fed to be data dependent and wait and see for months on the potential impact of tariffs. They are likely discounting the data like the markets, but that is a recipe to get behind the curve in our view," Roland and Miskin wrote in a note on Monday.
Simona Mocuta, chief economist, State Street Global Advisors
Mocuta believes the Fed should lower rates this summer to maintain US economic growth.
Today's rate cut situation reminds Mocuta of the Fed's hesitance to cut last year and the resulting 50 basis-point cut in September of 2024. Similar to Dutta, she's more worried about the labor market piece of the dual mandate than inflation.
"The reason why I do think the Fed should cut despite tariffs is that the labor market and the economy overall is at a much more delicate point to date than a year ago," Mocuta said on Yahoo! Finance last month.
Mocuta warned that labor demand continues to weaken, and some catalysts, such as the DOGE cuts to federal employment, won't show up in the hard data until later this summer or fall. Cutting too late could increase the risk of a recession.
"The economy avoids recession if consumer spending remains strong and that can only happen if the labor market remains strong," Mocuta said.
While Mocuta acknowledged that the Fed needs to keep inflation subdued, she believes it's better to have above-target inflation to prevent a recession rather than the other way around.
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