– The direction of the rate cuts may be clear but ‘the speed of the journey and the destination to which we are travelling are both unknown,’ says research strategist Michael Brown
NEW YORK
The US Federal Reserve’s jumbo interest rate cut makes sure of a “soft landing” in the US economy as inflation continues falling and the labor market softens, according to an expert.
“The Fed pivoted dovish, not only by cutting the funds rate by 50 basis points instead of the 25 basis points that had been widely anticipated, but also by projecting much more aggressive cuts through 2026 than in previous communications,” Martin Wurm, a director at Moody’s Analytics, told Anadolu.
The Fed lowered its interest rate last week by 50 basis points to a range of 4.75%-5.0%, starting its monetary easing in an aggressive way.
The move marked the first rate cut by the central bank in more than four years, since the beginning of the coronavirus pandemic.
Except for the emergency rate cuts during the start of the pandemic, the last time the Fed delivered a 50-basis-point rate cut was during the global financial crisis in 2008.
Although investors were initially worried that the jumbo cut was delivered to avoid a possible recession in the US economy, Wurm believes the Fed is sure of a soft landing, a situation when a central bank raises interest rates too much and too high, leading to an economic slowdown but avoiding a recession.
“As inflation has nearly returned to target and labor markets have softened substantially since summer, the move is aimed at ascertaining a soft landing,” he said.
“As (Fed) Chairman (Jerome) Powell put it, the Fed is ‘committed to not fall behind’ economic realities. This reflects warranted concerns that the previous projected rate path, which kept the policy rate above our estimated neutral rate of 4% for longer, would have resulted in overtightening and potentially a recession.”
‘No likely factors that would cause prices to resurge’
Powell told a post-meeting press conference that he does not see “anything in the economy right now that suggests the likelihood of a recession” or “an elevated downturn” in the American economy.
He added that the US labor market is in “solid condition” and the American economy is in “good shape,” while it is growing at “a solid pace.”
“The effects of the COVID-19 pandemic have played out, and energy prices have receded. Meanwhile, the US labor market has softened and is now in balance. It is, thus, time for the Fed to normalize,” Wurm said.
“As economic fundamentals remain resilient, rate normalization will, thus, keep workers in their jobs and families in their homes. Softer borrowing conditions will stabilize US economic growth and employment.”
Wurm emphasized that there are no likely factors in sight that would cause prices to resurge.
He noted that lower interest rates will benefit American consumers and companies by lowering mortgage and other borrowing rates, in addition to helping to stabilize the financial sector, which has struggled in the high-rate environment.
US stocks rallied last Thursday, the day after the Fed’s announcement.
The Dow Jones Industrial Average climbed 1.26% to close above a record 42,000 points, while the S&P 500 shot over 5,700 points for the first time in history by adding 1.7%. The Nasdaq, meanwhile, jumped 2.51%.
“Stocks have lurched higher overnight, with ‘green on the screen’ across the globe, as buyers come to the fore once more,” Michael Brown, a senior research strategist at Australia-based online forex and brokerage firm Pepperstone, told Anadolu.
‘Speed of journey and destination both unknown’
Brown, however, added that the magnitude of future interest rate cuts remains uncertain.
“The issue here, for policymakers and market participants alike, is that while the direction of travel – i.e., rate cuts – may be clear, the speed of the journey and the destination to which we are travelling are both unknown,” he said.
Despite Powell stating that a 50-basis-point rate cut should not be regarded as “the new pace” in monetary easing, Brown did not rule out the possibility of another jumbo rate cut in the future.
“Crudely, though, Powell & co.’s reaction function for now seems to be that 25-basis-point cuts will come at every meeting in the short term unless data – particularly jobs figures – softens beyond expectations, at which point 50-basis-point moves are in the frame once again,” he said.
The Fed may cut interest rates by an additional 50 basis points by the end of this year, or 25 basis points at each of its remaining two meetings in 2024, according to its latest projection materials released last Wednesday.
The bank may lower interest rates four more times by 25 basis points each during 2025, and two additional times by 25 basis points each during 2026, the projections showed.
