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In the lead-up to the FOMC meeting, most analysts expected the Fed to take its time and start by lowering rates by 25 basis points. However, the regulator surprised with a more aggressive cut.
Usually, such a move would indicate growing economic problems, increasing the risk of a recession or even a financial crisis. However, things seem different this time, judging by the optimism remaining in the S&P 500.
Investors seem to believe inflation pressures will ease more quickly without causing a hard landing. In fact, the Fed has revised its inflation forecast for 2024 from 2.6% to 2.3% and for 2025 from 2.3% to 2.1%.
Regarding the economy’s health, the Fed has lowered its GDP growth forecast for the U.S. in 2024 from 2.1% to 2%, while increasing the unemployment forecast for the same year from 4.0% to 4.4%.
This adjustment likely reflects the fact that, at the end of August, the total number of jobs was revised downward by 818,000, which means a loss of about 68,000 jobs per month.
Markets saw no risk to the stability of the economy or the financial system in general in the revised data and went for broke, with the major indices gaining around 1.5%.
Looking ahead, Fed members now expect a 100 basis point reduction in 2024, implying two 25 basis point cuts in the next few meetings and another 75 in total next year, leaving it between 3.25% and 3.5%.
In terms of implications for the economy, lower interest rates may not boost growth, but they will at least support it, reduce the burden of corporate debt and encourage investment in riskier assets.
As for risks, they continue to lurk despite market optimism. For example, the unrealized losses of U.S. banks are now seven times greater than at the height of the 2008 crisis.
Today, these losses amount to $512.9 billion, with Bank of America alone accounting for 20% of that amount. Let’s keep an eye on how this all plays out, while keeping an eye on data, including this week’s PCE.
