October 7, 2024
In September the Federal Reserve changed direction. Fed Chair Jerome Powell came out of the central bank’s Jackson Hole meeting and said the time has come for policy to adjust.
In other words, the Fed is lowering interest rates. This follows healthy rate hiking for the better part of a year and a half before pausing. Now the Fed is starting to drop rates.
Initially, I think most people expected a 25 basis-point cut. But the Fed went ahead with a 50-point cut.
That could be interpreted in one of two ways.
One is the Fed is behind the curve. The economy is in trouble and serious monetary loosening needs to start immediately.
Another is the Fed cut too much and perhaps inflation will start going back up. That’s what the central bank has been trying to avoid. It happened in the late 1970s – the Fed took its foot off the gas after thinking it had inflation handled, but then prices rose again as interest rates dropped.
So, time will tell whether the current strategy is correct. Regardless, the future course is clear. Chair Powell said the time and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.
The Fed doesn’t meet again until November. Of course, the market took the rate cut news and immediately ran with it to fresh highs.
That’s natural. The market loves cheaper money. But the more important underlying issue is whether the economy will fall into a recession or not.