Ernest & Young: The Federal Reserve is cutting interest rates reactively, not forward-looking

Gregory Daco, chief economist at Ernest & Young, said the Fed was "reactive" rather than forward-looking, according to Kim Ten, noting that "Powell acknowledged that if the Fed had seen the July jobs data first, it might have cut rates in July." Data released two days after the July meeting showed the unemployment rate rising to 4.3 percent, raising concerns that the Fed had waited too long to act. "Fed policymakers must adopt a strong forward-looking framework and move away from relying on data, which unfortunately they have not done so far." Another challenge for Powell is that Wall Street expects more future rate cuts than Fed policymakers predict. This week, policymakers estimated two more rate cuts of 25 basis points each by the end of 2024 and four more in 2025.
The Fed's rate-setting committee is almost evenly divided on the number of additional rate cuts it expects this year, with seven policymakers supporting an additional 25 basis points by the end of the year and nine supporting an additional 50 basis points. Two policymakers do not expect another rate cut. This path means that while several officials may support a 25 basis point cut this month, they are opting for a 50 basis point cut to avoid further deterioration in the job market.