Fed’s Uncertain Path: Economist Gregory Daco Criticizes Reactive Rate Cuts Amid Rising Unemployment Concerns

On September 22, COINOTAG reported that Gregory Daco, chief economist at Ernst & Young, criticized the Fed for being “reactive” rather than proactive in its approach to cutting interest rates. Data released shortly after the Fed’s July meeting indicated that the unemployment rate had risen to 4.3%, suggesting the Fed may have delayed action too long. Daco emphasized the need for a robust, forward-looking framework, moving away from reliance on historical data.

Daco highlighted a significant challenge for Fed Chair Jerome Powell: Wall Street’s expectations for more aggressive rate cuts compared to the Fed’s conservative predictions. This week, policymakers projected two additional 25 basis point rate cuts by the end of 2024, followed by four more in 2025. The Fed’s rate-setting committee is almost evenly split regarding the magnitude of cuts this year. Seven members support a 25 basis point cut, nine favor a 50 basis point reduction, and two policymakers foresee no further cuts in the near term.

This anticipated rate cut trajectory underscores potential divisions among Fed officials. While some may lean towards a modest 25 basis point cut this month, others could endorse a more substantial 50 basis point reduction to mitigate worsening employment statistics.