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Despite strong market expectations for a U.S. interest rate cut in September, the Federal Reserve has good reason to wait, according to economist Carl Weinberg.
Money market expectations for a rate cut at the Fed’s fall meeting rose from around 70% to more than 90% on Thursday, following a weaker-than-expected consumer price index report, according to LSEG data.
Fed Chair Jerome Powell had already hinted at such a move earlier this week, saying that keeping interest rates too high for too long carried risks, comments interpreted by analysts as “modestly dovish.”
However, monetary easing also carries risks that cast doubt on the prospects for a rate cut, Weinberg, chief economist at High Frequency Economics, said on CNBC’s “Squawk Box Europe” on Friday.
“The Fed chairman was very clear in his testimony this week … that inflation metrics and the economy in general are moving in the direction we would like them to,” Weinberg said.
This includes unemployment around 4%, inflation close to 2% and economic growth “more or less” at its potential, he noted.
“But (Powell) also implied, well, why would we want to change anything if the economy is at full employment, inflation is where we want it to be and it’s picking up nicely? Why would we want to tinker with what we have now? Why would you want to cut rates under those circumstances?” Weinberg continued.
“There is certainly noise, buzz and data to support a rate cut at the (September) meeting. But there is also a cloud hanging over that decision.”
While a rate cut might seem likely now, a lot could change between now and the Fed’s meeting on Sept. 18, Weinberg added.
Before then, two more consumer price index (CPI) releases are due. The Fed will meet again in late July, when markets have priced in only a 5% chance of a rate cut.
While inflation in the United States has peaked at a lower rate than in many other major economies over the past three years, it has also been slower to come down, leaving the Fed behind on the path to monetary easing.
Central banks in the eurozone, Switzerland, Sweden and Canada have already cut rates this year, while the Bank of England’s decision in August looks imminent.
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