Former Fed Official Urges Fed to Cut Rate in July

The Fed should lower interest rates, preferably at the meeting on July 31, former New York Fed President William Dudley said in an interview with Bloomberg.

He admitted that he had previously supported keeping monetary policy unchanged to combat inflation, but due to new circumstances, he has changed his position.

Dudley noted the effects of the Fed's previous efforts to cool down the economy.

Amid high consumption by wealthy households, less affluent citizens have felt the impact of high interest rates on loans. There is a decline in activity in the housing sector, and there are also signs of a decrease in investments.

Dudley mentioned a special indicator, the Sam rule, which predicts an imminent recession. This indicator accurately predicted economic downturns in the 1970s when the labor market was overheated.

The inflationary pressure that had worried the Fed in recent months has decreased, as shown by the annual PCE rate of 2.6% versus the target of 2%, he noted. This also applies to wage growth, which has slowed from a peak of 6% in March 2022 to 3.9% in June 2024.

Dudley named three reasons why the Fed is reluctant to cut the rate on July 31:

The Fed fears making a mistake — slowing inflation in the coming months will be challenging due to last year's low base.
Fed Chairman Jerome Powell is likely seeking a broad consensus on the actions of the central bank — not all "hawks" are ready to cut the rate in September.
The Fed does not seem concerned about the risk of the unemployment rate exceeding the level set by the Sam rule.