At long last, the easing cycle is upon us. Central banks are in the business of risk management, balancing risks in a fashion to best achieves their mandate. For the US Federal Reserve (Fed), that mandate is two-sided: price stability and maximum employment. With inflation rapidly closing in on target and labor markets rebalanced and now providing a disinflationary impulse, the dual mandate appears back in balance.
Pressing for further or faster progress on one side of the mandate introduces greater risks of unintended and unnecessary consequences on the other side of the mandate. Disinflationary growth continues, but downside risks are growing at the margin, particularly within the labor market, where softening can follow nonlinear paths.
Interest rate cuts by the Fed are not about easing to spur growth, but rather to move policy back from restrictive territory to a more neutral setting. That said, September now appears to be a lock for that first Fed cut. But keep the rationale for cuts in mind when assessing market pricing of the path of policy over the next year, as we’ll likely see markets price in an overly dovish reaction function at some point in the quarters ahead. This is a policy recalibration, not an aggressive easing cycle.