The U.S. Federal Reserve is facing increasing pressure to accelerate rate cuts in order to avoid a potential policy error that could result in a prolonged economic slowdown. British fund manager abdrn has predicted that the U.S. economy may experience a soft landing, but there are still concerns about the possibility of a significant downturn in 2025. Kenneth Akintewe, the company’s head of Asian sovereign debt, raised questions about the Fed’s current approach to monetary policy in light of recent economic data.
Is the Fed Making a Mistake?
Speaking on CNBC’s “Squawk Box Asia,” Akintewe highlighted the risks associated with relying solely on headline economic indicators. He pointed to the example of non-farm payrolls, which were later revised to show a weaker economic picture than initially reported. In August, the U.S. Labor Department revealed that the economy had created 818,000 fewer jobs than originally stated between April 2023 and March 2024.
The Bureau of Labor Statistics conducted preliminary annual benchmark revisions to the nonfarm payroll numbers, revealing that the actual job growth was nearly 30% less than previously reported. Akintewe questioned whether the economy was already weaker than the headline data suggested and whether the Fed should consider implementing further easing measures to support economic growth.
The Time Lag in Policy Changes
Akintewe emphasized that changes in monetary policy take time to have a tangible impact on the economy. He suggested that if the economy was indeed weaker than the headline data indicated, the Fed would need to implement a significant amount of easing, potentially 150 to 200 basis points, which would require time to accumulate. Additionally, once these easing measures were in place, it would take six to eight months for them to be fully transmitted throughout the economy.
The Potential Delay in Effects
If the economy were to show signs of further weakness at the beginning of 2025, Akintewe warned that it could take until the second half of the year for any easing measures to take effect. By that time, the economic landscape could look significantly different, underscoring the importance of proactive policy action by the Fed.
Addressing the Policy Rate Discrepancy
Akintewe also questioned the discrepancy between the current policy rate of 5.5% and the inflation rate, which has dropped to almost 2.5%. He raised concerns about the necessity of maintaining a 300 basis point real policy rate in an environment characterized by uncertainty and lower inflation rates. Akintewe challenged the prevailing market focus on predicting the size of potential rate cuts, arguing that broader considerations of economic conditions and policy effectiveness should also be taken into account.
Market Response and Rate Cut Expectations
Recent data showing a slight uptick in the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred measure of inflation, has led to speculation about the size of potential rate cuts. U.S. rate futures currently suggest a lower probability of a 50 basis-point rate cut later in September. Market expectations are leaning towards a 25-basis-point cut at the upcoming Fed meeting, with a smaller percentage anticipating a more substantial 50 basis-point reduction.
Looking Ahead
As the Fed navigates the complex economic landscape, the pressure to accelerate rate cuts intensifies. With concerns about a potential policy error and the need for proactive measures to support economic growth, the central bank faces critical decisions in the coming months. The evolving economic data and market responses will play a significant role in shaping the Fed’s approach to monetary policy and its impact on the broader economy.