Krishna Guha on Fed's 'Wait and See' Mode and September Rate Decisions

Fed's September Decision Framework

• 🎯 The Federal Reserve is expected to maintain a 'wait and see' approach through the summer, with a decision on interest rates likely in September.
• 💡 While the Fed will emphasize data dependency, the bar for a September cut is not considered high, suggesting a soft default towards a rate reduction.
• ⚠️ Two Trump appointees, Waller and Bowman, are anticipated to dissent in favor of an immediate cut.

Labor Market Data and Fed Policy

• 📊 The Fed is waiting to see data from June, July, and August before making a call on rates, indicating a need for a broader economic picture.
• 📉 The labor market has shown aggregate strength but with some softening under the hood, particularly in private sector hiring outside of health and education.
• ⚡ Confirmation of weak private sector hiring in upcoming reports would push the Fed more towards a September rate cut.

Economic Data Quality Concerns

• 🧐 Economists express concern over the quality of official government economic data, with some inputs for CPI now being estimated based on other inputs.
• 📉 While US data is generally considered good, there's a noted deterioration in data collection methods and potential reporting biases, such as undocumented migrants responding differently to surveys.
• ⚠️ The deterioration in data quality is a concern, as it could make it difficult for the Fed, businesses, and households to make informed decisions, though it's not yet as severe as in the UK.

Tariff Policy and Economic Clarity

• 🌍 The Fed, like others, desires clarity on tariff policy to better assess its economic impact.
• 🤝 While clarity has been achieved on some fronts (European, Japanese), the Fed is unlikely to adopt an absolutist stance, waiting for perfect clarity on all tariff issues before making decisions.
• ⚖️ The Fed's approach to tariff policy is seen as a risk management assessment, typical of monetary policy decisions.