Ernst & Young Chief Economist: Fed Cutting Rates Reactively, Not Proactively

On September 22, Ernst Young Chief Economist Gregory Daco said that the Fed is cutting rates 'reactively' rather than prospectively.

Data released two days after the July meeting showed that the unemployment rate rose to 4.3%, raising concerns that the Fed has waited too long to act, and that Fed policymakers must adopt a strong forward-looking framework and abandon their dependence on data, which, unfortunately, they have not done so far.

Another challenge Powell faces, according to Daco, is that Wall Street expects more future rate cuts than Fed policymakers project. 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 split on the number of additional rate cuts it expects this year, with seven policymakers supporting an additional 25 basis point cut by the end of the year and nine members supporting an additional 50 basis point cut. Two policymakers do not expect another rate cut. This path implies that while several officials may support a 25 basis point cut this month, they would opt for a 50 basis point cut in order to avoid a further deterioration in the job market.