The Federal Reserve has two mandates: Low/stable inflation and maximum employment.
Today, Deutsche Bank looks at the core consumer price index and unemployment rate in the historical context of where rate cuts have begun in the past.
The bulk of cuts didn’t get underway until unemployment was in the 5-6% range, compared to 3.8% at the moment. If that’s going to be the playbook from here, then there will be plenty of kicking and screaming before rates are lowered. And the pay will certainly be much more hawkish than the 89 bps of cuts in 2024 that are priced in now.
Perhaps 2019 is a better analogue because it’s the most-recent. However, while unemployment is already higher than it was then, core CPI is still 2 percentage points away.
To me, the lesson from looking at this chart is that actual core CPI needs to get into the low 2s before the Fed will move, barring a shock.
“Can we get inflation down
quick enough to start cuts before the restrictive policy bites the economy hard
or causes an accident?” DB asks.