Yesterday, the Federal Reserve made a notable move, cutting the federal funds rate by 0.50%, bringing the benchmark range to 4.75-5%. This unexpected cut, larger than the anticipated 0.25%, reveals the Fed’s growing concerns about the economy. The focus has shifted from controlling inflation to addressing rising unemployment risks. Fed Chair Jay Powell acknowledged this shift, stating that “the downside risks to employment have increased.”
This rate cut signals the Fed’s belief that the economy is not as strong as they once projected. The decision to cut more aggressively hints at deeper economic challenges on the horizon, even as Powell remains optimistic about the long-term outlook. The Fed has also confirmed that it will continue to reduce its securities holdings, further signalling a cautious stance toward the broader financial landscape.
The impact on markets was swift: stocks initially rallied but closed slightly down for the day. Gold prices hit new highs, while oil prices have continued to slide, underscoring the uncertainty in the economic outlook.
So, what’s next? The Fed’s own projections show more rate cuts likely at their upcoming meetings in November and December. Whether those cuts will be enough to avoid a recession remains to be seen, but market expectations are diverging from Powell’s optimism. As the economy shows signs of weakening and the future is unclear: Buckle up, in case we face a turbulent ride.
Sven Franssen