[Interview] "US Fed Missed Rate Cut Opportunity in June-July... Still Forecasts Soft Landing"

'Stagnation Fear' Hits US Economy Diagnosis
Urgent Interview with Two US Economic Experts
Barry Eichengreen, Professor at UC Berkeley
David Wessel, Senior Fellow at Brookings Institution

"The U.S. Federal Reserve (Fed) should have cut the benchmark interest rate in June or July."

As the 'fear of R (Recession)' swept across global financial markets from Asia to the United States, two U.S. economic experts diagnosed that the Fed missed the opportunity to pivot (policy shift) by holding the benchmark interest rate steady at 5.25?5.5% for the eighth consecutive time in July. However, they acknowledged that while the risk of recession has indeed increased due to the cooling labor market revealed in last month's employment report, the possibility of a soft landing for the U.S. economy remains higher. The 'panic sell-off' that swept global stock markets amid concerns of a U.S.-originated recession is considered an overreaction.

Professor Barry Eichengreen of UC Berkeley (left) and Senior Fellow David Wessel of the Brookings Institution

On the 5th (local time), Barry Eichengreen, a world-renowned scholar in international economics and finance and a professor at the University of California, Berkeley, stated in an interview with Asia Economy, "In hindsight, it would have been appropriate for the Fed to cut interest rates in July." This is due to the contraction in U.S. manufacturing activity reported last week and the unemployment rate rising to 4.3% last month, which has fueled recession fears.

However, he noted that the market is currently overly reliant on a single data point and that the fear of recession is exaggerated.

Professor Eichengreen said, "One bad monthly jobs report does not cause a recession," adding, "Existing labor market data have been quite good, and employment indicators can continue to change going forward." He further stated, "It is meaningless to change forecasts based on a single monthly report," and predicted, "Many are focusing on the downside risk that the U.S. economy will slow faster than expected, but there is also a possibility that the economy will not enter a recession."

On the other hand, voices have emerged emphasizing the need to pay attention to the rising risk of recession. While the possibility of a soft landing for the U.S. economy remains higher, concerns have grown that the risk of recession has clearly increased, as revealed by the July employment report.

David Wessel, a senior fellow at the Brookings Institution and director of the Hutchins Center on Fiscal and Monetary Policy, known for his expertise in the Fed and monetary policy, diagnosed, "The employment report was weak, and corporate earnings reports were also concerning," adding, "The sharp drop in the stock market will not boost market confidence."

He pointed out that the Fed should have cut rates proactively. Beyond the growing theory on Wall Street about missing the July rate cut, he advocated the 'June miss theory.'

Senior fellow Wessel said, "One of the major risks to the U.S. economy is that the Fed is waiting too long to cut interest rates," adding, "The Fed has almost won the fight against inflation, but now faces the battle to prevent further rises in unemployment." He continued, "The Fed should have cut rates in June," and expressed confidence that at least some Fed policymakers share his view.

On Wall Street, expectations are gaining momentum that the Fed will make a 'big cut' by lowering rates by 0.5 percentage points at the September Federal Open Market Committee (FOMC) regular meeting. Senior fellow Wessel also supported the big cut forecast. He predicted that the Fed would cut rates by 0.5 percentage points in September and lower them by an additional 0.5 percentage points by the end of the year, totaling a 1 percentage point cut within the year.

However, Professor Eichengreen believed that it would be appropriate for the Fed to lower rates by 0.25 percentage points as scheduled in September. Earlier, Fed Chair Jerome Powell drew a line under the possibility of a big cut in September during a press conference following the FOMC regular meeting on the 31st of last month.

Professor Eichengreen said, "Considering the scale of ongoing monetary tightening, it is appropriate for the Fed to begin a gradual easing in September," and predicted, "The Fed will not panic but rather maintain its existing policy. The rate cut in September will be 0.25 percentage points."

Regarding future economic prospects, both experts agreed that consumer spending, which accounts for two-thirds of the U.S. real economy, will decline, leading to a slowdown in U.S. economic growth. The U.S. economic growth rate recorded an annualized 1.4% in the first quarter and 2.8% in the second quarter of this year.

Professor Eichengreen forecasted, "Workers have exhausted their financial buffers (excess savings) accumulated after the COVID-19 pandemic and are currently under pressure from high interest rates," adding, "U.S. consumer spending is likely to slow moderately."

Senior fellow Wessel said, "Consumer spending has been surprisingly strong so far, but many households have depleted the excess savings accumulated during and immediately after the pandemic," and predicted, "Rising unemployment will also erode consumer spending." He further forecasted, "Economic growth in the second half of the year will be considerably weaker compared to the first half."

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