Rate Cuts Could Come This Year If Fed Can’t Get Inflation Under Control, Analysts Suggest

With the July Federal Open Markets Committee meeting fast approaching, speculation about another substantial rate hike is running rampant.

After June’s historic 0.75 percentage point interest rate hike, the third hike this year and the largest since 1994, analysts are watching the Fed closely. Recession fears are rapidly growing, with 70% of economists expecting it by 2023.

But Federal Reserve Chairman Jerome Powell said he was more concerned about high inflation continuing than about the possibility of rising interest rates causing a recession.

“Is there a risk we would go too far? Certainly there’s a risk,” Powell said this week. “The bigger mistake to make, let’s put it that way, would be to fail to restore price stability.”

Some experts are unconvinced of a coming recession.

St. Louis Fed President James Bullard published an essay last week citing two years when the Fed raised rates but a recession did not follow.

Federal Reserve Bank of New York President John Williams recently said he expects the central bank to consider another rate hike, but believes a recession is avoidable.

“We’ve got to get interest rates higher and we need to do that expeditiously. In terms of our next meeting. I think, you know, 50 [basis points] or 75 [basis points] is clearly going to be the debate,” he said.

Federal Reserve Bank of Cleveland President Loretta Mester said that if economic conditions are the same at the time of the July meeting, she will suggest a 75 basis point hike.

“If conditions were exactly the way they were today going into that meeting — if the meeting were today — I would be advocating for 75 because I haven’t seen the kind of numbers on the inflation side that I need to see in order to think that we can go back to a 50 increase,” she told CNBC.

Fed Governor Michelle Bowman and Governor Christopher Waller, have also backed a 75 basis-point hike.

But some analysts say rate increases won’t last. Though the consensus states that rate increases will continue through at least the end of next year, a few individuals have begun predicting they will end sooner rather than later.

“Can you really hike interest rates into a recession even if inflation is high? That would be unusual,” Erik Nielsen, global chief economist at UniCredit, told CNBC.

“There is a very high chance the Fed ends up cutting rate towards, sort of, the end of next year or something, and this is the recession story again.”

Michael Yoshikami, the founder of Destination Wealth Management, also predicted that if the economy slips into stagflation similar to that of the 1970’s, rate cuts could come this year.

“Inflation is runaway right now. The Federal Reserve is going to bring out these multiple very, very strong signals that they’re looking to control inflation, it is going to dip the economy into a slow growth, stagflation or a recessionary environment and then I think the Fed going to start cutting rates again later on this year,” Yoshikami told CNBC.

“If the Federal Reserve moves us closer towards recession and breaks the back of inflation and has to cut a little bit to simulate the economy, I don’t think that’s necessarily a bad thing.”