One chart that shows why the Federal Reserve went for a big cut
The Federal Reserve is worried about the labor market.
The median monetary policymaker thinks the unemployment rate (currently 4.2%) will be at 4.4% at the end of this year and the next, a worse outcome than they foresaw when releasing their last set of projections in June.
But that’s not all. Officials think that, if they’re wrong, it’s more likely to be because the job market does worse than they anticipate and the unemployment rate is even higher.
Twelve monetary policymakers think the risk is that the unemployment rate goes up even more than they expect. That’s the same number that felt the same way back in June 2019, right before the central bank started a small rate-cutting cycle at its next meeting.
Here is the issue. The balance of risks has changed. In June, most saw balanced risks to unemployment rate. Now, this has completely flipped. Most see risks to unemployed skewed to the upside. This will not be the last time we see a 50, in our opinion. pic.twitter.com/wKpW9tdK8R
— RenMac: Renaissance Macro Research (@RenMacLLC) September 18, 2024
It’s a pretty simple formula: realized inflation has come down, the unemployment rate has gone up, and based on history, Federal Reserve officials are aware that when it rises this much, it tends to keep rising. The central bank does not want high borrowing costs to be a problem for the economy because inflation is no longer a big problem for the economy.
