Paul McCulley on Fed Rate Cuts, Data Dependence, and Neutral Policy Rate

Data Vacuum and Fed Policy

• 💡 Paul McCulley suggests that the absence of data in the short term will paradoxically reduce the Fed's excessive reliance on data dependence.
• 🎯 He believes the accumulated data over the past three to four months strongly indicates the Fed needs to move from a restrictive to a neutral policy stance.

Path to Neutral Policy Rate

• 🚀 McCulley anticipates 25 basis point rate cuts at the next three to four Federal Reserve meetings.
• 📈 This would bring the policy rate to the three to three and a half percent zone, which he considers neutral.
• 📊 The current yield curve, with the two-year Treasury around 3.5% and the 10-year around 4%, is seen as consistent with this neutral rate, though not yet validated by the policy rate.

Internal Fed Dynamics and Disagreements

• 🧠 McCulley acknowledges that the FOMC's reluctance to commit to future cuts is normal and that there is genuine disagreement within the committee.
• 📌 The primary disagreement appears to be about the terminal rate, with some members not wanting it below 3% to 3.5%.
• ✅ However, he notes a widespread consensus on the committee that a move towards neutrality is necessary, and Chair Powell is expected to guide a steady pace of cuts without explicit promises.