As anticipation builds for the Federal Reserve’s next move, many are expecting a rate cut in September. However, this could be a grave mistake.
The Fed’s primary responsibilities are clear: maintaining price stability and ensuring maximum employment. It is not the Fed’s job to stimulate the housing market, ease consumer burdens, or reduce credit card debt. While these are important economic factors, they fall outside the Fed’s core mandate.
In July, inflation dropped to a 3-year low of 2.9%, which is a significant improvement from the post-pandemic highs. However, this figure still sits above the Fed’s target of 2%. Cutting rates now, while inflation remains above target, risks reigniting price pressures, especially as we’re just emerging from a period of high inflation.
On the employment front, the U.S. added 114,000 nonfarm jobs in July—down from the average of 215,000 over the past year, but still positive. Unemployment ticked up to 4.3%, but crucially, layoffs are not on the rise, and the participation rate remains strong, with expectations of further increases.
Lowering rates under these conditions—where inflation is still above target and employment is steady—would not only be premature but could also lead to greater inflationary pressures down the road. The Fed should stay the course, focus on its mandate, and avoid making a move that could destabilize the progress made so far.
Sven Franssen