3 reasons the Fed should cut interest rates this month instead of waiting for September

"If the case for a cut is clear, why wait another seven weeks before delivering it?" Goldman Sachs economist Jan Hatzius said.

• The Fed should cut interest rates at its meeting this month, according to Goldman Sachs.
• Economist Jan Hatzius highlighted three reasons a rate cut makes sense this month rather than in September.
• The market sees a 100% chance of a rate cut in September, but only a 7%chance for a cut in July.

The Federal Reserve should cut interest rates at its upcoming policy meeting on July 31, according to Goldman Sachs.

Goldman's top economist, Jan Hatzius, said in a note on Monday that inflation has made enough progress back to the Fed's long-term target of 2% that would warrant a July rate cut.

"Using the latest unemployment and inflation numbers, we estimate that the median of the Fed staff's monetary policy rules now implies a funds rate of 4%, well below the actual rate of 5.25% - 5.50%. Based on this observation, the encouraging June CPI, and Chair Powell's congressional testimony last week, we expect adjustment cuts to start soon," Hatzius said.

Imminent interest rate cuts have become the market view, with the CME FedWatch Tool suggesting a 92% chance of a 25 basis point rate cut at the Fed's September 18 FOMC meeting, and even an 8% chance of a 50 basis point rate cut.

But, according to Hatzius, "Why wait?"

"We see a solid rationale for cutting as early as the July 30-31 meeting," Hatzius said.

Hatzius sees three reasons the Fed shouldn't wait.

First, the data is clear now, he says.

"If the case for a cut is clear, why wait another seven weeks before delivering it?"

Second, he noted that cutting this month would reduce the risk of doing so in the midst of an unexpected reheating of inflation.

"Monthly inflation is volatile and there is always a risk of a temporary acceleration, which could make a September cut awkward to explain. Starting in July would sidestep that risk," Hatzius said.

Finally, there's politics to consider, and the Fed may want to avoid cutting too close to the November presidential election.

"The FOMC has an undeniable (if never acknowledged) incentive to avoid initiating cuts in the last two months of a presidential election campaign. This doesn't mean the committee couldn't cut in September, but it does mean that July would be preferable," Hatzius said.

While an interest rate cut from the Fed in July may appear like the obvious choice to Hatzius, it would be a big surprise for markets.

According to the CME FedWatch Tool, investors see just a 7% chance of an interest rate cut at this month's FOMC meeting.