At the Federal Reserve’s September 18th meeting, it made a decisive move in its ongoing efforts to manage the U.S. economy, enacting a significant half-point interest rate cut. This move, which brought the federal funds rate down to a range of 4.75% to 5%, reflects Chair Jerome Powell’s intent to guide the economy towards a “soft landing” without tipping into a recession. As inflation cools, Powell’s priority is to ensure that previous rate hikes do not overburden the economy, especially as mixed signals continue to emerge from key sectors like the labor market.
The rate cut also brings new uncertainties to the surface. Specifically, the Fed is now faced with two key questions: where to steer rates next and how quickly to move. While Powell has been clear that the Federal Reserve is aiming for a “neutral” rate, one that neither stimulates nor hinders economic growth, he has also admitted that the exact level of this rate remains unclear. “The neutral rate is probably significantly higher than it was before the pandemic”, Powell remarked, signaling that the Fed’s target has shifted (Timiraos 2024). However, he acknowledged that the exact level of the neutral rate remains uncertain, underscoring the challenges the Fed faces as it recalibrates its monetary policy.
The pace of future rate cuts is equally uncertain. Powell was careful to temper expectations that this half-point cut would establish a pattern for future meetings, emphasizing that there’s no rush to continue making large cuts. Investors hoping for a predictable trajectory may need to adjust their outlook, as the central bank will have more labor-market data to consider before its November meeting, making the decision between a 25 or 50-point cut another open question.
The rate cut has also sent ripples through the financial markets, with both bond and stock markets reacting in ways that reflect broader economic uncertainty. While short-term rates fell in response to the cut, longer-term rates, such as the 10-year Treasury yield, have been rising. This divergence suggests that predicting the path of future interest rates is becoming more complex, especially with the labor market showing mixed signals. Priya Misra of J.P. Morgan states “it’s a race between the labor-market deceleration that’s happening and the Fed reducing restrictiveness”, emphasizing the fine balance the Fed must strike between cutting rates to support employment and avoiding moves that could overheat the economy (Timiraos 2024).
The financial markets’ reactions to the rate cut have been similarly mixed. Both the Dow Jones Industrial Average and S&P 500 showed resilience, reaching record highs despite some early market jitters following the Fed’s announcement. As Erik Aarts, a senior strategist at Touchstone Investments, pointed out, “interest rates and bonds still are at levels that are attractive to investors who may have been waiting for the first rate cut to act” (Wiltermuth 2024). He points out that there may still be opportunities for those ready to navigate the uncertainties ahead.
The Federal Reserve’s recent rate cut marks a significant, though cautious, step in its efforts to stabilize the U.S. economy. As Powell navigates the difficult terrain of balancing labor market support with inflation control, investors and economists alike will be watching closely for signs of the Fed’s next move. The question of whether the Fed can maintain this delicate balance without triggering an economic slowdown will be a defining factor in the months to come.
Sources
Timiraos, Nick. “Big Rate Cut Forces Fed to Contend with New Obstacles.” The Wall Street Journal, 18 Sept. 2024, www.wsj.com/economy/central-banking/big-rate-cut-forces-fed-to-contend-with-new-obstacles-0bc63c6a.
Wiltermuth, Joy. “After Fed Rate Cut, the next 6 Months Will Be Crucial for Investors. Here’s Why.” MarketWatch, 19 Sept. 2024, www.marketwatch.com/story/after-fed-rate-cut-the-next-6-months-will-be-crucial-for-investors-heres-why-2eff08c8.
Comments