The Fed has two mandates: low/stable inflation and maximum employment.
Today, Deutsche Bank looks at core CPI and the unemployment rate in the historical context of where interest rate cuts began in the past.
The bulk of the cuts did not begin until unemployment was in the 5-6% range, compared to 3.8% currently. If this is the rules of the game from here, there will be a lot of kicking and screaming before interest rates are cut. Wages will almost certainly be much tighter than the 89 basis point cuts in 2024 that have been priced in now.
Maybe 2019 is a better counterpart because it’s more recent. However, while unemployment is actually higher than it was then, the core CPI is still two percentage points away.
To me, the lesson from looking at this chart is that the actual core CPI needs to get below Level 2 before the Fed acts, barring a shock.
“Can we get inflation down fast enough to start cuts before restrictive policy hurts the economy too badly or causes an accident?” Decibel asks.