The Case for a July Fed Interest Rate Cut: What Economists Are Saying

Key Takeaways:

• Nearly a quarter of economists say the Federal Reserve should cut interest rates at its meeting at the end of this month, according to a recent survey.
• Most economists still forecast the Fed will wait until September to cut its influential fed funds rate, a view that’s also held by financial market participants.
• Fed officials have said they need to see more data that indicates inflation is under control before starting to cut the central bank’s benchmark interest rate, which is at a 23-year high.

For some economists, July is the new September. That is, some economists believe the Federal Reserve should begin cutting interest rates at its next meeting at the end of the month. These economists argue recent economic data is enough evidence that inflation is falling toward the central bank’s annual goal of 2%. In a recent Wall Street Journal survey of economists, 24.6% held that view.

“If the case for a cut is clear, why wait another seven weeks before delivering it?” wrote Goldman Sachs Chief Economist Jan Hatzius in a separate commentary this week.

However, only a slim percentage of economists believe a cut is likely to happen this month: 98.5% of economists surveyed by The Journal said the Fed will make its first interest rate cut sometime after the July meeting. The majority of economists believe central bankers will cut in September, a view that’s also held by financial market participants.

Making the Case for a July Cut

The Federal Reserve has held its key interest rate at a 23-year-high for the past 12 months, putting pressure on consumers and businesses, as part of an effort to cool the economy and tame inflation. Inflation trended downward since hitting its peak in June 2022, but progress has faltered some in the last year.

However, Hatzius argues, recent economic data has pointed to higher unemployment and potentially slower GDP growth, which could become an issue if the Fed lets it go unchecked for too long.

Central bankers, for their part, are keeping an eye on these factors. In fact, in recent weeks, members of the policy-making committee, including Chair Jerome Powell, have said they are keeping a close eye on the labor market to avoid unwanted spikes in unemployment that could signal a recession.

The debate over whether the Fed should cut rates in July or wait until September hinges on several key factors. Economists who advocate for a July cut point to slowing economic growth and rising unemployment as signs that immediate action is needed to prevent a downturn.

On the other hand, those who argue for waiting until September believe that more data is needed to confirm that inflation is under control and that a rate cut is necessary. They also point to the potential risks of cutting rates too soon and fueling inflationary pressures.

Ultimately, the decision on when to cut interest rates will depend on how economic data evolves in the coming weeks. If inflation continues to trend lower and economic growth remains sluggish, the case for a July rate cut may become more compelling.

In conclusion, the debate over whether the Federal Reserve should cut interest rates in July or wait until September reflects differing views on the state of the economy and the appropriate policy response. While some economists argue for immediate action to address slowing growth and rising unemployment, others advocate for a more cautious approach that takes into account the risks of cutting rates too soon. The final decision will depend on how economic data evolves in the coming weeks and whether policymakers believe that a rate cut is necessary to support continued economic expansion.