US Economy Faces Recession Risk as Leading Index Falls 16% Federal Reserve Officials Divided on Rate Cuts

The latest economic indicators suggest that the US economy is on the brink of a recession. The Leading Economic Index (LEI), as reported by The Conference Board, decreased by 0.1% in May, marking the sixth consecutive monthly decline. This index has now fallen 16% from its peak, reaching its lowest level in nine years. Over the past six months, the index has been declining at an annualized rate of approximately 5%, a trend that historically signals an impending recession. Out of the last 39 months, the index has decreased in 37, a pattern that has consistently preceded recessions since 1960.

Federal Reserve Chairman Jerome Powell is scheduled to testify before Congress on Tuesday and Wednesday, starting with the House Financial Services Committee and then the Senate Banking Committee. These hearings, while routine, are taking place against a backdrop of significant political and economic pressure. The White House, along with some Fed officials, is advocating for rate cuts, with President Donald Trump and his administration pushing for dramatic reductions. Two Fed officials, Michelle Bowman and Christopher Waller, have publicly supported rate cuts starting as early as July. Bowman, speaking in Prague, indicated that she sees a case for easing policy next month if inflation data does not spike. Waller, on the other hand, supported a cautious approach to lowering rates. Both officials were appointed by Trump during his first term and are being considered as potential replacements for Powell next year. Their public stance has disrupted the Fed's unified front and prompted market adjustments.

Mohamed El-Erian, chief economic advisor at Allianz, noted the political influence on the Federal Open Market Committee (FOMC), highlighting that the public support for July cuts by two Republican-leaning governors was not coincidental. He suggested that Powell will face challenges in unifying the committee's message. From the outside, Trump and several of his officials are calling for significant rate cuts, at least two full percentage points. However, Waller himself rejected the idea of rapid cuts, stating that he prefers a slower approach. The Fed's recent projections place the end-point rate around 3%, only 1.25 points below the current level. If the Fed cuts too quickly, it could backfire, as seen when the Fed cut rates by a full point between September and December last year, leading to an increase in bond yields due to expectations of rising growth and inflation.

Jai Kedia, a research fellow at the Cato Institute, argued that the belief that rate cuts immediately benefit the economy is a myth. He stated that people overvalue the Fed's immediate impact on the economy. Meanwhile, Bill Pulte, who leads the Federal Housing Finance Agency, posted on X Monday that there is growing momentum for Powell's immediate resignation, claiming that Powell's political bias against the President needs to be addressed. Powell, however, has not responded, and as the Fed chair, he is just one of 12 voters on the rate-setting committee, currently lacking a unified team. Senator Elizabeth Warren has also been calling for a rate cut, and during this week's hearings, Powell will likely face questions from both parties, with Republicans demanding to know why rates haven't come down and Democrats urging him not to wait.