I am ready to call it. The Fed should cut rates. July would be the right time to start in my opinion. To be clear, I don’t think they will do this. I still think the baseline first cut is November because the next few inflation prints will appear sticky enough for the Fed to keep rates where they are. And the election is too close to the September meeting for them to initiate cuts then. So I still think November is what we’re looking at. But if I were Jerome Powell I would cut in July. Here’s why:

If you look at the Roche Recession Rule, (not so) famously named for myself, by myself, you’ll see that there’s been no real cause for concern in recent years. Here’s the problem though – if Thursday’s relatively high jobless claims figure persists thru this year (or moves higher) then we are likely to trigger a recession warning according to this not so famous metric.

If you look at the Taylor Rule, which was very right about the Fed raising rates much earlier than they did, then they should be at 5% right now. That’s going to trend lower in the coming quarters and will likely end the year around 4.5%.

There are numerous other signs that cutting could be appropriate – rising unemployment, rising claims, falling hourly earnings and core PCE that is likely to be at 2.55% in May. We’re so close to target, but the Fed has this obsession with an arbitrary 2% figure and is ignoring the fact that a second wave of high inflation is nowhere to be seen.

But most importantly, if they cut from 5.25% to 5% it’s not even a big move. Mortgage rates will still be totally unaffordable for most people. Lending rates will still be very high. The Fed would likely need to cut rates to 4% or lower to get mortgage rates back down to 5%. So we’re talking about baby steps when we talk about rate cuts. It’s not like a rate cut is going to cause an enormous speculative borrowing binge because a 5% rate is really not that different from a 5.25% rate.

And that brings us to the most, most important part – the calendar. The election puts the Fed in a bind. They don’t want to look political and so July is the only realistic meeting at which they could cut before the election. That leaves us with 6 long months to wait if they choose not to cut at July. And that’s 6 months where the data could continue to deteriorate meaningfully. And if they wait until November they’ll be cutting when we’re already in a recession and they’ll be behind the curve because it will then take very large cuts or emergency cuts to get rates down to a stimulative position of under 4%. Cutting in July also sets the precedent that they’re starting and so if they needed to cut again right before the election it wouldn’t look politically motivated. In other words, a move in July hedges lots of downside bets without risking a second runaway wave of inflation.

So there it is – I am calling it. The Fed should cut rates. It’s just a little baby step so don’t send me hate mail saying a 0.25% rate change is going to set the world on fire. They’ll move from 5.25% to 5% and then this might even give them more flexibility to get ahead of a potential need to cut later in the year without being very far behind the curve like they were in 2022 when they started raising rates almost a year after the Taylor Rule said they should. In sum:

  1. The Fed should cut at the July meeting.
  2. Inflation is low enough, wages are slowing rapidly and unemployment is rising.
  3. One cut isn’t going to spark a second wave of inflation.
  4. The calendar is so spread out that they can cut and still have ample time to reassess.

NB – This is your periodic reminder that if I was the supreme dictator of the USA there would be no need for commentary like this because interest rates would be 100% automated and I wouldn’t have to make up all this subjective commentary justifying why we make discretionary decisions about rates. We’d just have a robotic automation of interest rates instead of this haphazard reactionary and overly discretionary process.