Fed before crucial rate step: Is the signal coming too late?

A decisive meeting of the US Federal Reserve is scheduled this week to discuss a possible interest rate cut – the first since December. Economic indicators have deteriorated in recent months with a weakening labor market performance. Futures contracts suggest a rate cut, which many observers consider long overdue. In particular, Fed Governors Christopher Waller and Michelle Bowman have been advocating a reduction since July, in line with former President Donald Trump's demand for lower rates. Waller, regarded as a potential successor to Jerome Powell as Fed Chair, warned in Miami that monetary policy risked "losing track" if economic conditions continued to deteriorate. The challenge is to time it precisely, as the consequences could affect millions of jobs and inflation. Despite criticism, the Fed has been accused in the past of reacting too late to rising inflation. Economic forecasts are tricky. In the past, they have been wrong, such as in 2023 when a recessionary development was predicted but did not materialize. The chief economist of Northwestern Mutual calls the question of whether the Fed has already missed its intervention the "million-dollar question." Interest rate decisions must consider delayed effects, which require precise timing. In particular, the trade policy of the former Trump administration, including tariff impositions, has influenced price dynamics. However, Fed representatives like Mary Daly and Alberto Musalem view the price increases resulting from tariffs as one-time adjustments that could weaken in the coming quarters. The labor market, originally described by Fed Chair Powell as "solid with downside risks," is now showing weaker data. The recent Labor Department report revised employment figures downward by a total of 911,000 jobs less than initially stated. In light of these corrections and slow employment growth, expectations for significant rate cuts are increasing, as highlighted by ING economist James Knightley. Chicago Fed President Austan Goolsbee pointed out that the upcoming meetings will be completely open due to the unpredictable data situation. "We need to find a solution," he said.