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The Federal Reserve is making a big mistake by not cutting interest rates right now, according to GlobalData TS Lombard chief US economist Steven Blitz.
By waiting to loosen monetary policy, Fed chairman Jerome Powell is falling into the trap of being reactionary rather than anticipatory when it comes to interest rate decisions.
Blitz said in a note on Wednesday that Powell is all but guaranteeing that they won't cut interest rates until after a recession has arrived, and by then, it will be too little too late for lower interest rates to have the intended effect of stimulating the economy.
Powell said at the central bank's policy meeting on Wednesday that one way he would cut interest rates is if there was a surprise significant hike in unemployment, regardless of where inflation is. That comment "cements" Blitz's thinking that the Fed will be too late to the party.
"By not cutting now, pre-emptive is off the table and this, in turn, guarantees that when they do cut it will be too late to avoid recession - the usual course of events," Blitz said.
Of course, Powell said during his press conference that if inflation gets back down to the Fed's long-term target of 2%, they would have flexibility in reducing interest rates, but that last mile of getting inflation back down to the target level appears out of reach for now based on a string of hotter-than-expected inflation reports so far this year.
And if inflation sees a sharp rebound to 5%, "they obviously hike" interest rates, Blitz said.
But the reactionary nature of the Federal Reserve hits on something market watchers have been cautioning about for a while, including Jeremy Siegel, who has argued that the Fed was too late to the game in hiking interest rates in 2022 when inflation was running out of control in 2021.
All-in, according to Blitz, it means that interest rates could stay at current levels for longer-than-expected, especially since it appears there will be no recession this year.
