What is the reason for cutting rates? Not clear

Everyone says that rate cuts are coming although the Fed has certainly not argued that they will be seen soon. Its position is that rates will be higher for longer. Any rate cut issue should be focused on the "why" question. Is there a case for rate cuts based on a recession? No. Is there a reason for rate cuts based on inflation? Maybe, but not likely. To get the answers, all we have to do is focus on labor markets as a starting place.

If there is an expectation for a recession, then the Fed should cut rates; however, a look at the current labor market suggests that there is no reason for cut. Labor markets are still tight and the recent data do not provide evidence of a softening. Hence, no reason to cut based on recession story. 

If inflation has been beaten, then there is a reason for a cut; however, the evidence is not strong. Inflation has come down but labor and service costs are still above the 2% target and they are not showing the softening price movement seen in the goods markets. There is no reason for a cut.

For those focused on markets, any Fed cut has to be looked at conditionally. No recession and we will have a nice rally. If there is a recession, the Fed signal just reinforces the idea that monetary policy is necessary to stem the decline.