The Fed should cut rates swiftly — recession or not

economictimes.indiatimes.com:

Federal Reserve is to act with urgency, cutting its policy rate a percentage point to 4.25%-4.5% by the end of the year in the name of risk management.

It’s a level of easing that the Fed is likely to undertake even if the rise in unemployment ends up being somewhat benign since we no longer need such restrictive rates to tame inflation. It makes sense to frontload those rate cuts rather than run the risk of being too slow to act to forestall worse economic outcomes.

If we really are heading into recession, there’s not much disagreement on what the Fed should do: Cut interest rates a lot and fast. That’s where market pricing has shifted after a rocky week of economic data. Interest rate futures suggest the Fed will cut its policy rate by over 200 basis points by the end of 2025, taking the fed funds rate down near 3%. This seems reasonable based on what we’ve seen in prior recessions.

It’s the second scenario that is more challenging. The jobless rate has climbed this year from 3.7% to 4.3%, but the percentage of people between the ages of 25 and 54 who are employed has also risen, from 80.4% to 80.9%. That’s an unusual dynamic with the unemployment rate reflecting, in part, rising labor force participation.

Unemployment rise spurs fears of slowdown, yet recession signals have been wrong — so far

It’s possible that the explanation of a gradual normalization is the correct one, that there’s little risk of a rapid increase in unemployment, and that the Fed has time to be patient. But putting