Dive Brief:

• The economy expanded at a higher-than-forecast 3% annual rate during the second quarter, government data revealed Thursday, moments before a Federal Reserve governor warned that the central bank’s decision last week to cut borrowing costs by a half percentage point risks spurring demand and refueling inflation.
• Gross domestic product growth has quickened since increasing at a 1.6% annual pace during Q1. GDP during Q3 will probably rise at a 2.9% annual rate, according to an Atlanta Fed forecast.
• “There continues to be a considerable amount of pent-up demand and cash on the sidelines ready to be deployed as the path of interest rates moves down,” Fed Governor Michelle Bowman said. “Bringing the policy rate down too quickly carries the risk of unleashing that pent-up demand,” she said, advocating gradual cuts that would “avoid unnecessarily stoking demand and potentially reigniting inflationary pressures.”

Dive Insight:

Bowman was the only policymaker to oppose a central bank decision on Sept. 18 to cut the main interest rate to a range between 4.75% and 5%.

Supporters of the easing cited progress in slowing inflation toward the Fed’s 2% goal from more than 9% two years ago, as well as a softening in the labor market and the risk of an economic downturn.

Bowman backed a quarter-point cut to the federal funds rate and said in a speech Thursday that “restoring price stability is essential for achieving maximum employment,” which is the other half of the Fed’s dual mandate.

Other members of the Federal Open Market Committee have recently expressed more confidence than Bowman that inflation is on a sustainable path to the 2% goal.

“I strongly supported last week’s decision and, if progress on inflation continues as I expect, I will support additional cuts in the federal funds rate going forward,” Fed Governor Adriana Kugler said in a speech Wednesday.

“The labor market remains resilient, but the FOMC now needs to balance its focus so we can continue making progress on disinflation while avoiding unnecessary pain and weakness in the economy as disinflation continues in the right trajectory,” Kugler said.

With the labor market softening and unemployment remaining comparatively low, some economists and Wall Street analysts have suggested that the Fed is piloting the economy to a “soft landing,” or slowing inflation without triggering widespread job loss and a recession.

“What appears to be unfolding before our eyes is a soft-landing scenario only the most optimistic dream of,” EY Chief Economist Gregory Daco said Thursday in an email, highlighting encouraging signs in the GDP data.

“Overall, this latest snapshot of the U.S. economy is reassuring as it indicates higher corporate profits near historic highs, at 13.2% of GDP, and stronger real household disposable income momentum, at 3.1% y/y [year over year], despite the labor market cooldown,” Daco said.

“Solid productivity growth remains the key pillar to the U.S. economic outperformance while consumer prudence in the face of higher prices continues to drive disinflation,” he said.

The economy will likely grow 2.7% this year and 1.8% in 2025 as slower inflation, lower interest rates and a looser labor market support more sustainable economic growth, Daco said.

The Fed will likely trim borrowing costs by a quarter point at every policy meeting through June 2025, reducing the benchmark rate to 3.4%, he said. However, a rapid rise in the unemployment rate toward 4.5% may prompt Fed Chair Jerome Powell to call for another half percentage point reduction at the FOMC’s Nov. 6-7 meeting, Daco said.