In “Rocky II,” as Adrian — the main character’s love interest — tells the boxer to win by beating Apollo Creed in a rematch, Rocky’s manager Mickey yells, “What are we waiting for?” That line could be aimed at the Federal Reserve after Friday morning’s jobs report. The unemployment rate climbed to 4.1% in June and wage inflation is falling, with average hourly earnings up 0.3% last month. Payroll reports have also been revised down significantly in recent months. It’s time for the Fed to cut rates at the end of July. If the central bank wants to see “further progress on inflation,” I’d say it already has, including Friday’s jobs figure, which came in slightly above the Dow’s forecast of 200,000. Add to that the moderation in the consumer price index, producer price index, and personal consumption expenditures price index—the Fed’s preferred gauge of inflation—and the need to wait for further signs of improvement seems overblown. Another measure of inflation, the New York Federal Reserve’s multivariate core trend, slipped to 2.36% in May. Moreover, the Atlanta Fed’s second-quarter economic growth forecast, GDPNow, fell to an annual rate of 1.5%, after topping 3% just a few weeks ago. To be sure, the consumer economy appears resilient, judging by expectations of record travel around the Independence Day holiday. But consumers are starting, at least anecdotally, to cut back on home improvements, such as pools, that were all the rage during the pandemic. If the Fed waits until inflation reaches its 2% target before cutting rates, it will have inadvertently tightened interest rate policy just as the economy is slowing. That overshoot could also lead to an unnecessary recession. Moreover, if the Fed cuts later—rather than sooner—there will be accusations of political interference if it cuts rates just before the presidential election. That’s a move it’s typically reluctant to make. By starting in July and adding another cut in September, the Fed could avoid uncomfortable claims that it’s lending a helping hand to President Joe Biden, rather than acknowledging the reality of an economic slowdown and falling inflation rates. Like Rocky, the Fed has been fighting the fight of its life. The central bank has had to contend with a pandemic that has sent the economy into meltdown, soaring prices, and uncertainty about the impact of its policies on the broader economy, inflation, and consumer behavior over time. Some economists have consistently warned the Fed that its policies were likely to lead to a repeat of the great inflation of the 1970s and early 1980s. We now know that this is not the case at all. There has been no second wave of inflation, no feared wage-price spiral, and in many ways no significant additional shocks to the system that would justify higher rates for much longer. In fact, a long-awaited decline in rents, at least in some major metropolitan areas, has begun to materialize. This is a factor that will likely push inflation rates lower. Even if the Fed feels a little drunk after the beating it took from its various critics, the central bank should take a lesson from Rocky and Adrian. Go out and win. What are we waiting for? — CNBC contributor Ron Insana is CEO of iFi.AI, a financial technology company specializing in artificial intelligence.
News Source : www.cnbc.com
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