Before the release of the US GDP data, the calls for a rate cut in July are getting louder

Economist and member of the forecasting team at The Wall Street Journal, Joseph Brusuelas, expects that the initial annualized quarterly real GDP for the United States in the second quarter, to be announced tonight at 20:30, will reach 2.4%, significantly higher than the market's general expectation of 2%. However, he mentioned that there are some downside risks to the forecast.

In December 2023, Brusuelas and his economic research team were included in Bloomberg's "Best Bond Forecasters List" for correctly predicting year-end prices for benchmark bonds.

The economist pointed out that the two main fluctuating factors affecting GDP data are inventories and government spending. He believes that the performance of inventories in the United States should be quite strong, potentially making overall economic activity appear stronger, while a slowdown in government spending may drag down economic growth.

Taking into account the dynamics of inventories, trade, and government spending, Brusuelas tends to focus more on the actual final private demand in the private sector, believing that this demand should be close to the long-term trend growth rate of 1.8%. Previously, when the GDP data for the first quarter was released, the economist emphasized the importance of focusing on the actual final private demand excluding inventories, trade, and government spending (growing at 2.6%), as this is a better indicator reflecting the real economy rather than the more volatile overall data.

Brusuelas expects this indicator, like other data from the past three months, to indicate that the real economy in the United States is cooling down, which will be favorable for the Fed to cut rates in September.

On another note, Brusuelas's team predicts that the growth rate of consumer spending will be close to 2.5%, showing stability, and sustained private investment will be the main driver of overall economic growth this quarter. They also anticipate that the initial annualized quarterly core PCE price index for the United States in the second quarter will reach 2.6%.

Brusuelas points out that any data close to these forecasts will increase the Fed's rhetoric for a rate cut this month. Although this scenario may not occur, if the Fed purely relies on data, then a slowdown in hiring, 2.4% inflation, and a continuously cooling economy should prompt the Fed to start cutting rates.

The Fed is expected to maintain its policy rate within the range of 5.25% to 5.5% at the meeting on July 30th to 31st. However, the economist predicts that the FOMC's policy statement will change in wording to suggest a rate cut in September. Additionally, the Fed may take note of the shift in risk balance in the labor market towards weakness, further confirming the market's already fully digested content: a rate cut in September.

Brusuelas believes that with the economy cooling down and inflation nearing the Fed's 2% target, the Fed has missed the optimal timing for rate cuts. Further inflation declines may occur in the goods sector, pricing in the service sector is also easing, and inflation in owner-occupied housing will eventually slow down