A 25-basis points interest rate cut this week is in the bag. But, as always, financial markets’ greed is pushing for more, prodding the Fed to “go big” -- with another quarter point bonanza. Traders have already taken some key U.S. money market rates in that direction.

Will the Fed cooperate? Anything can happen in an election year. The Fed is keeping interbank markets very liquid, but the effective federal funds interest rate is unlikely to be brought down to 4.75% from its current level of 5.33%.

Present evidence on inflation, employment, expected growth dynamics and the monetary-fiscal policy mix suggests patience -- and the need to see more data points on those key variables.

The Fed’s preferred inflation gauges have come down but need to stabilize below their present levels before concluding that demand and supply in labor, goods and services markets have reached a sustainable balance.

That is particularly the case for service prices – a sector that accounts for approximately 90% of U.S. economy. It’s worth recalling that the initial phase of service sector price inflation took hold as a result of “second-round effects” of rising costs of food and energy.

Don’t rush into credit easing

Those “second round effects” still look quite sticky despite a significant slowdown of food prices and double-digit declines of energy prices. The problem could be that service markets are more sheltered from competition than they should be.

Services, however, are by far the largest part of the economy. It may, therefore, take a substantial weakening of aggregate demand before the general inflation level becomes anchored around the Fed’s 2% medium term objective.

Employment, contrary to a surprising anxiety of some Fed governors, is doing well – growing by 235 thousand people in the three months to August, and remaining roughly identical to the level of the year earlier when the jobless rate was 3.8%.

One should also remember that a 4.2% unemployment rate in August is still below the 4.5% to 5.5% range considered as America’s full employment unemployment rate, or a “non-accelerating inflation rate of unemployment“ (NAIRU), defined by the National Bureau of Economic Research.

The next question is: Where is the unemployment rate going?

That, of course, will depend on the likely growth outlook for the U.S. economy. Luckily, all one can say about that -- on current evidence – is that the main drivers of domestic demand look good.

The country has full employment, with the demand for labor still strong enough to add thousands of new jobs. Similarly, inflation adjusted personal disposable incomes continue to grow, and the increasing bank lending to the private sector shows a resilient household spending.

U.S. economy needs a balanced policy mix

By contrast, the external sector – accounting for about 30% of the economy -- remains an important drag on aggregate demand. In the first half of this year, net exports shaved off 0.7% of the GDP growth.

The U.S. foreign trade will get much worse in the months ahead as a result of (a) America’s strong domestic demand, (b) stagnating growth in the European Union, a market for a quarter of American exports, and (c) pervasive impediments to trade with the rest of the world.

That is a stark reminder that trade sanctions and a punishing judicial overreach are poor substitutes for diplomacy and a peaceful modus vivendi that would be much more productive and profitable for American economy.

Indeed, somebody should think – and do something – about the fact that those large trade deficits are increasing America’s net external debt ($21.3 trillion at the end of March 2024) that is now growing at an unsustainable quarterly rate of $1.4 trillion.

The final and a powerful argument against monetary easing is America’s excessively expansionary fiscal policy.

Interest rate cuts and a government spending running at a 4% annual rate are an inflationary policy mix in an economy already hitting physical limits to growth. And that’s what is happening to the U.S. economy: Its 3% growth rate in the first half of this year is double the potential and noninflationary growth based on the stock and quality of human and physical capital.

An inescapable path to rising inflation and deep recession? Yes, that’s a safe bet for an economy pushing interest rates down at a time of 8% of GDP budget deficits and a public debt of $35 trillion (123.4% of GDP) and counting.

And that will be a serious policy mistake, because the Fed can easily explain to the Congress and the American people that a monetary easing is inappropriate in a fully employed economy with a hugely stimulative fiscal policy.