Federal Reserve makes the big pivot | Tatiana Bailey
The Federal Reserve made a pivotal decision last week by not only cutting interest rates for the first time since early 2020, but also by cutting more than expected, with a half-percentage-point reduction.
Usually, the Fed cuts rates by a quarter-point, so this is somewhat monumental.
Federal Reserve Chairman Jerome Powell has endured much scrutiny over the past couple of years for holding interest rates at multiple-decade highs due to persistent inflation, with many saying the Fed was going to push us into recession.
The Fed did not feel enough progress was happening with inflation until recently, with the core inflation rate now averaging 1.7% over the past three months, well below the acceptable 2% target.
The other Fed mandate is to keep the nation at full employment. Powell recently stated that he is increasingly concerned about the increases in unemployment, even though our current U.S. rate is low by historical standards. Powell pushed for this bigger interest rate cut and got what he wanted.
Businesses benefit from lower rates, because it’s easier to borrow and more consumers buy their goods. This makes businesses more confident in terms of keeping or obtaining new workers; hence, the positive impact on employment and the stock market.
For the average consumer, lower interest rates mean it’s easier to buy large-ticket items like appliances, cars or houses. Lower credit-card interest rates should ensue and help reduce consumer debt and delinquencies, which have increased.
I think the housing market, in particular, will take off quickly with this half-point cut, as many buyers and sellers will jump in. I will caution, however, that the changes you see on smaller-ticket items including credit cards will not be monumental.
Also noteworthy are the 2024 and 2025 Fed forecasts for interest rate cuts adding up to 1½ more points, slightly higher but still acceptable unemployment at 4.5%, GDP at the long-term trend rate of 2%, and inflation acceptably at 2%.
This all translates optimistically to a “normal” economy with a “soft landing.”
If, indeed, unemployment stays relatively low, which I think it will, and our strong U.S. economy stays resilient, this will bode well not only for the Fed and the stock market, but probably also bode well for Vice President Kamala Harris.