Economist William Lee: Fed's Powell makes case for larger, sooner rate cuts

Following the US Federal Reserve's third consecutive rate cut, economist William Lee believes that Chair Jerome Powell's commentary is implicitly building a case for more significant and swifter monetary easing. Speaking with CNBC TV18, William Lee, chief economist at the Milken Institute, said that while Powell navigates a complex economic picture, the underlying message points towards the need for a larger cut, possibly 50 basis points, sooner rather than later.

Lee highlighted what he described as Powell's tough job of balancing conflicting economic signals. While the Fed Chair noted the economy is performing well, with Gross Domestic Product (GDP) growth pointing towards 4%, the labour market is simultaneously showing signs of rapid weakening, with employment growth turning negative. "He's trying to say to the inflation hawks, you're fighting last year's battle," Lee observed.

According to Lee's interpretation, Powell believes the current inflation is being temporarily propped up by the effects of tariffs, which are expected to dissipate within the typical one-year to 18-month lag of monetary policy. He added that the high service sector inflation is also gradually decreasing. Given this context, Lee reads Powell's statement that the Fed's policy rate is on the "high side of normal" as a significant signal. With a weakening labour market, Lee believes a strong case exists for moving the rate to the "low side of normal."

While acknowledging that this was his own reading of the situation, Lee concluded that the downside risks to the labour market are substantially greater than the upside risks to inflation. He suggested that Powell is trying to make a case for pre-emptive action despite what he termed a "cloud of uncertainty" surrounding data on both inflation and the labour market.