Optimism for a September rate cut could backfire: Economist

The CME FedWatch tool shows a nearly 100% chance of an interest rate cut in September as some economists join the call for an interest rate cut as soon as this July. Mizuho US Chief Economist Steven Ricchiuto joins Market Domination to discuss the state of the economy and what it signals for the potential of an interest rate cut.

Ricchiuto believes that the most recent economic data shows “an economy that is still very, very resilient.” He continues, “We’ve been data-dependent all along. We came into the year suggesting that there would be a transition in the economy from above-trend growth to trend growth. And that along with that, we’d see some modest easing up of the labor market conditions. But inflation would get stuck at around the 3% level, as opposed to the 2% level. And largely, that’s still the case. The economy looks as if it’s going to average 2% over the first half of the year, which is trend.”

He adds that the current data is showing “the best period of economic information to say we should be cutting rates. But the reality is you haven’t quite hit that test yet of where you should be to really cut rates, and the market wants to adjust so aggressively that it’s creating a financial market environment that I think is providing extra stimulus to the economy. And that could very well preclude a rate cut.”

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This post was written by Melanie Riehl

Video Transcript

The CME fed watch tool now fully pricing and a cut in September.

But some economists are now calling for a cut at the meeting later this month, but be careful what you wish for.

At least that’s according to our next guest.

Joining us now is Steven Raso Mizuho, us chief Anonymous Stephen.

It’s good to see you.

Um Actually wanna start Stephen with, with the economic news we got this morning.

I just wanna curious to get your take there that June retail sales data we got, Steven is better than expected.

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I’m curious to, to hear what you made of that report and just more broadly where you think the American consumer is at right now.

Yeah, I think the retail sales number today, you know, moves the series back to what you would expect given where the payroll employment numbers are the income generation coming off of that and the industrial production coming off of that.

This is an economy that is still very, very resilient.

The US consumer is resilient.

And although we like to talk about og the labor market is becoming more balanced, you know, we’re going from an exceptionally tight labor market condition of 3.7% to 4.1% unemployment.

And that’s still below what we economists typically believe is the neutral rate of unemployment.

So it’s still a tight labor market.

The fact that the consumer is, you know, resilient as a result of that should not be a surprise, Steven.

Um I believe you were one of the folks coming into this year who said, maybe we won’t get any rate cuts.

Um When the rest of the market was quite certain that we would get many, I’m curious where, where you’re at now, given, you know what we heard from J Pal the other day, given the latest inflation readings and given the retail sales numbers today.

Yeah, you’re asking a really good question.

I mean, I think that the, the point here is we’ve been data dependent all along.

We came into the year suggesting that there would be a transition in the economy from above trend growth to trend growth.

And then along with that, we’d see some modest easing up of the labor market conditions and, but inflation would get stuck at around the 3% level as opposed to the 2% level and largely that’s still case.

Um You know, the economy looks as if it’s gonna average 2% over the first half of the year, which is trend, it’s not below trend.

Uh It looks as if the uh labor market is eased up a bit, but really not a lot.

Uh In addition to that inflation is in this 2.6 area and given the, the benchmarking or the base effects, we’re likely to move higher as the balance of the year progresses.

So you’ve kind of got the best period of economic information to say we should be cutting rates.

But the reality is you haven’t quite hit that test yet of where you should be to really cut rates.

And the market wants to adjust so aggressively that it’s creating a financial market environment that I think is providing extra stimulus to the economy.

And that could very well preclude a rate cut.