The Fed should cut interest rates this week

Federal Reserve Chairman Jerome Powell and his colleagues understand and have articulated that risks are two-sided. If they cut too soon, inflation may stage a comeback or, more likely, not decline all the way to the Fed’s 2% target. If they hold rates too high for too long, the economy may weaken or even slip into a recession.

Money is tight right now. With inflation in the 2.5% to 3% range, depending on how you measure it, the current federal-funds rate of 5.25% to 5.5% leaves the real interest rate—the interest rate adjusted for inflation—around 2.5% to 3%. The Fed is squeezing the economy, though certainly not suffocating it. Eventually, rates must come down. But when?

Investors are betting the FOMC will begin cutting rates at its meeting on Sept. 17-18, and that would be my bet, too. No meeting is scheduled in October, and rate cuts certainly won’t start at the Nov. 6-7 meeting, immediately after Election Day. That would be unseemly. Therefore, if the FOMC doesn’t start cutting rates on Sept. 18, it will likely wait to do so until its Dec. 17-18 meeting, which is a long way off—maybe too long.

But there’s another option: cutting rates at the July 30-31 meeting. While few people think that’s a live possibility, maybe it should be, as the Journal’s Aaron Back argued recently. I agree with Mr. Back, but the FOMC appears not to. Not even the committee’s doves are making July 31 noises.

Rather, Mr. Powell recently said: “We want to be more confident that inflation is moving sustainably down toward 2%. . . before we start . . . loosening policy." Other FOMC members have made similar statements.

That sounds entirely reasonable. But given the inherent uncertainties in forecasting inflation, I’m not sure how much more confident the committee members will ever be—short of waiting until we actually reach the 2% promised land, which would probably make them too late.

Too late for what? Remember, the Fed has a dual mandate: to pursue both low inflation and high employment. For a while, monetary policy was failing on the low-inflation part, so Fed officials naturally concentrated on trying to remedy that. But since the June 2022 peak in personal consumption expenditures inflation (the Fed’s preferred measure), inflation has been tracking down, down, down. Other than the aforementioned blip in March, the 12-month PCE inflation rate has been flat or falling every month since last September. Looks like a trend to me.

What about the other part of the mandate—high employment? There, the performance of the U.S. economy has been sensational. The national unemployment rate has been 4.1% (its current level) or lower for an amazing 32 consecutive months. During those 32 months, more than 10 million jobs have been added to U.S. payrolls—an average of 315,000 per month.

While the jobs cornucopia has been great, the American jobs machine has slowed a bit lately. Net job creation thus far in 2024 has been 191,000 a month—still good but slower. And the unemployment rate, while still low, has been creeping up. The last four monthly prints are 3.8%, 3.9%, 4%, 4.1%. Although the Fed is still fulfilling the employment charge in its dual mandate, that side is slipping a bit while the inflation side is improving.

The Fed regularly declares itself to be data-dependent, and virtually everywhere you look—jobs, retail sales and more—the economy seems to be simmering down. The Fed has taken notice of that.

While the stars look to be aligning for a September rate cut, why wait? There’s still time for a July 31 cut. The FOMC has grown accustomed to a “no surprises" approach to interest-rate changes. Markets are virtually told in advance what’s coming. So a 25-basis-point rate cut on July 31 would be a surprise—but only a small one if Mr. Powell dropped a hint or two beforehand. I believe the markets would stand up and cheer.

Any such early cut should be accompanied by a warning not to expect a steady stream of rate cuts unless the data merit it. That’s roughly what the European Central Bank did on June 6, when it dropped its main rates by 25 basis points but warned: “We are not pre-committing to a particular rate path."

In advocating a quick rate cut, I realize I’m acting a bit like Don Quixote. But I recognize a windmill when I see one. A rate cut on July 31 isn’t going to happen—but maybe it should.

Mr. Blinder is a professor of economics and public affairs at Princeton. He served as vice chairman of the Federal Reserve, 1994-96.