The Fed's rate cut is imminent, beware of the first cut becoming a "shackle"!

The Bloomberg editorial board recently stated that the financial markets are not waiting for a rate cut from the Federal Reserve, but for a further policy shift. However, this expectation places too much importance on the Fed's next move and may constrain the Fed's actions when conditions change. Here are the key points from the Bloomberg editorial board:

Federal Reserve Chairman Powell recently mentioned that he would like to see more positive news on inflation before considering a rate cut. He seems to have gotten what he wanted.

The overall CPI year-on-year rate for June dropped to 3%, down from 3.3% in May, while the core CPI rate slowed from 3.4% to 3.3%. Investors subsequently raised their expectations for a rate cut by the Fed in September and began speculating whether a cut could happen as early as the end of this month.

There is no reason to rule out the possibility of a rate cut in July or September. Given the risks of an economic slowdown, it seems appropriate to moderately ease monetary policy now.

Although inflation remains high, the latest data suggests that slightly lower policy rates should still be restrictive enough to help the Fed achieve its target of returning inflation to 2%. The U.S. real GDP annualized growth rate for the second quarter came in at 2.8%, slightly higher than expected but confirming a noticeable cooling of the economy compared to last year.

At this week's Fed policy meeting, policymakers could reasonably conclude that short-term rates can be cut.

However, there is a more important question than whether a rate cut happens now or in two months, and that is what Powell and his colleagues intend to do next. If they are wise, they will leave room for maneuver.

The Fed has rightly pledged to act based on data. However, the financial markets are not just expecting a one-time rate cut, but a "shift" towards a lower rate path. This view is not favorable as it places too much importance on the Fed's next move and may constrain the Fed's actions when conditions change.

Indeed, market expectations are logical, stemming from the Fed's desire to gradually and predictably adjust policies and avoid unexpected events. Stability is good, but gradualism and data dependence sometimes point in different directions. Fed officials need the freedom to change their minds when facts change. If they tie policy to a real or imagined timetable, they often end up facing greater and more serious surprises.

The policy rate of 5.25% to 5.5% is firmly restraining demand. In particular, housing inflation, which has been stubborn so far, has weakened; core service inflation excluding housing and energy is a closely watched indicator, and it declined for the second consecutive month in June. Crucially, the previously overheated labor market has cooled. Job vacancies have significantly decreased, and the unemployment rate has risen to 4.1%. The risk balance has shifted, and the reasons for a rate cut seem compelling.

The key point is— if the Fed does cut rates, it should explain that this move is a result of data-supported decisions, not a prelude to further easing. **If subsequent data indicates that inflation remains stable above 2%, then loose monetary policy will need to be reversed, and the Federal Reserve should alert investors to this possibility.

In addition, the notion of returning to the "normal" policy interest rate path assumes that the Federal Reserve knows what this "normal" figure is, but in reality, the Federal Reserve does not know, nor does anyone else. Ultimately, only data can provide the answer