Experts forecast gradually fed rate cuts and reject aggressive approaches. Following Friday’s labor market data and comments from New York Fed President John Williams, investors are debating whether the Federal Reserve will ease monetary policy gradually or opt for more aggressive rate cuts.
Caldwell believes the Fed will take a measured, gradual approach to cutting interest rates, rather than front-loading significant rate reductions. “There’s a significant number of market participants who are expecting a 50 basis point rate cut in the upcoming meeting, and indeed, the typical market participant expects at least one 50 basis point cut by December,” Caldwell said. “But I don’t think that’s likely. I do think the Fed will cut every meeting the rest of this year, but just by 25 basis points each.”
Reduced Need for Urgency
Caldwell explained that the bond market has already priced in a greater degree of rate cuts, with bond yields falling. “That will already start to work its way into the economy, stimulating borrowing and other aspects of it,” he said. “So that’s kind of already front-loading the impact of monetary policy easing and reducing the need for the Fed to hurry.”
Additionally, Caldwell does not believe the labor market is poised to “fall off a cliff.” Instead, he sees the labor market normalizing, with job openings and hiring rates returning to more typical levels and wage growth aligning with 2% inflation.
Unemployment Uptick Not Concerning
Regarding the recent uptick in the unemployment rate, Caldwell is not overly concerned. “I think to the extent that it’s real, and to be clear, the underlying source data from other parts of the job data is pointing in a contradictory direction to some extent.
However, to the extent we do have a genuine increase in unemployment of that magnitude, I think it’s driven chiefly by increased labor supply and not by layoffs,” he explained. “And so we’re not likely to get into this vicious cycle, or certainly we’re not right now in this vicious cycle of job cuts and cuts in spending that tend to accompany layoffs.”
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