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At the last meeting, FOMC members voted to review monetary policy, as expected. What was surprising, at least to analysts, was the magnitude of the decision to cut rates by 50 basis points immediately.
Typically, the Fed opts for such a move when the economy is on the brink of crisis. However, based on the data leading up to that critical meeting, things didn’t seem that dire, to say the least.
Sure, there were signs of some slowdown, but nothing severe enough to justify such a significant rate cut. This has sparked speculation that there may have been outside pressure on the Fed.
And if wondering who might be behind it, it’s worth noting that we’re right in the middle of the U.S. presidential election campaign, where both parties are pulling out all the stops to secure votes.
Could it be that the Fed expected things to get worse?
If so, those worries don’t seem to be paying off. September’s U.S. labor market data was quite strong, with 254,000 new jobs added, significantly higher than last year’s average of 203,000.
In addition, previous months turned out to be better than initially reported, with 72,000 more jobs posted in July and August. It appears that the labor market is not as weak as previously thought.
It’s worth noting that the Fed cited a weak labor market as a critical reason for cutting rates by 50 basis points. Thus, this abrupt move may not be entirely justified from an economic standpoint.
So what happens now?
No one will reverse the decision or raise rates by 50 bp again, as that would undermine confidence in the Fed and potentially disrupt the S&P 500. Instead, the Fed will likely be more cautious in its upcoming meetings.
So, instead of the 50 basis point cut that markets predicted for November, a 25 basis point cut seems more likely, provided the economy did not suffer a setback before then.
Still, this scenario does not seem to worry markets too much. No more rate hikes? That is good news. And the fact that the economy remains strong is not a cause for concern.
Let’s see how companies perform in their Q3 results, especially what they forecast for the next quarter and what this week’s CPI and PPI data reveal.
