(Bloomberg) -- Economist Marc Sumerlin, viewed as a candidate to chair the Federal Reserve, said policymakers should slash interest rates next month, but cautioned that they would have to stop if longer-term Treasury yields rose.
"The weakest part of the market, or the economy right now is housing, and so you can't have the long end go up," Sumerlin, an economist who runs the consulting firm Evenflow Macro, said in a television interview on Bloomberg Surveillance. "That's your constraint right now."
Sumerlin was addressing a scenario that unfolded last year, when the Fed cut its benchmark rate by 50 basis points in September, and went on to lower rates twice more, even as 10-year Treasury yields rose. That increase in longer-dated yields pushed up mortgage rates, which use them as a reference.
For now, there's scope for a 50 basis point cut at the next Fed meeting, Sumerlin said, pointing to signs at the short end of the Treasuries curve. While the Fed's current target for its benchmark overnight rate is 4.25% to 4.5%, six-month Treasury bills are yielding 3.94%.
"One of the reasons I support the 50 basis point cut right now is that you have the inversion in the front end of the curve," Sumerlin said. "That's something like 60 basis points last time I looked. And so you know that you can cut by that amount without really upsetting things."
'Simple' Decision
Asked what the Fed should do if it cut by 50 basis points next month only to see 10-year yields go up, Sumerlin said, "Then you stop."
"You have to stop cutting, it's that simple," he said.
Fed policymakers have held interest rates steady this year, buying time to see the impacts of President Donald Trump's tariffs on inflation and employment. A weaker-than-expected jobs report has bolstered chances of a September rate cut, however. Investors price in over 90% chance of a rate cut next month. In July, two Fed governors, Christopher Waller and Michelle Bowman, dissented in favor of a quarter-point cut.
Sumerlin is part of a list of candidates under consideration replace chair Jerome Powell in May, Bloomberg has reported. He served as an economic policy adviser in the George W. Bush administration.
--With assistance from Lisa Abramowicz and Jonathan Ferro.
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