Taking the other side of the rate cut discussion, Cato Institute Research Fellow Jai Kedia, believes no rate cut is necessary and there is a risk of greater inflation, which could necessitate a rate increase.
“The Fed cut its target for the federal funds rate by 25 basis points with near unanimous consent. The weakening labor market ultimately convinced the FOMC to cut the rate. [Still, this] decision is not a clear positive, with recent data showing inflation well above the Fed’s 2 percent target. In fact, monetary policy rules would advocate keeping rates steady or even a minor increase. This increased uncertainty is likely the result of negative supply factors that make the Fed’s job much harder.”
Kedia recently wrote that following a series of disappointing employment reports, markets expected a rate cut, with a 25 basis point decrease the most likely outcome. However, the recent inflation report shows that prices are increasing much faster than the Fed’s 2 percent target, indicating real concerns of a supply shock that has caused both inflated prices and unemployment. In such situations, guidance for monetary policy is ambiguous, with a standard monetary policy rule advocating no change to rates or even a slight increase.
Prediction market Polymarket currently has another 25 bps cut in October at 78%. Kalshi is about the same.