Jerome Powell gave Wall Street exactly what it had been yearning for—a hefty rate cut to justify this year’s rally in stocks and bonds, signalling the long-awaited pivot away from the Fed’s austere monetary stance. But as the initial euphoria subsided, the cold winds of economic uncertainty blew in. Even with a bold half-point rate cut—a move typically reserved for moments of crisis—the investment horizon remained as murky as ever. Stocks, already flirting with record highs, offered little comfort, and it’s anyone’s guess whether the days of near-zero rates, obliterated by post-pandemic inflation, are on their way back anytime soon.
The audacity of Powell’s decision to lead the Fed into a half-point cut was unmistakable, a bid to keep the economy steady as cracks in the labour market began to show. In his usual calm, Powell suggested this bold move would help secure the elusive “soft landing” he’s been aiming for all along. Yet, as groundbreaking as it may have been, Powell wisely stopped short of promising more dramatic cuts ahead, leaving room for the Fed to adjust based on how things unfold.
Of course, this wasn’t without its dissent. Enter Michelle Bowman, the first Fed governor in nearly two decades to object, opting for a more modest quarter-point cut—a quaint throwback to when central bankers had the luxury of fine-tuning monetary policy instead of swinging sledgehammers.
Updated projections added to the drama. While the median Fed official still sees another 50 basis points worth of cuts on the horizon, not everyone is on board. Seven of the 19 policymakers are calling for just 25 basis points next year, while two remain the lone voices of caution, opposed to any further cuts in 2023. Meanwhile, investors—never ones to be left behind—are pricing in a much more aggressive 70 basis points of cuts by year-end. Clearly, Wall Street has a more daring view of the Fed’s future than the central bank itself.
Powell, for his part, took the opportunity to temper expectations, reminding markets that the Fed doesn’t plan to make a habit of lopping off half a percentage point in one go. Still, the bond markets had seen enough: investors scrambled to adjust their forecasts, bracing for a potentially bumpier road than they had initially mapped out.
However, the Fed’s forceful move suggests they’re ready to act even more aggressively if the labour market deteriorates further. With unemployment now at 4.2%, up from a low of 3.4% last year, and job growth slowing to its weakest pace since the pandemic, the landscape isn’t exactly rosy. The once impressive two-to-one ratio of job openings to unemployed workers is now just about even.
On the inflation front, things have cooled, with the rate sliding to 2.5%, edging closer to the Fed’s target. But the devil is in the details. The latest core CPI, which excludes food and energy, has crept up to 3.2%, still far from that coveted 2%. Powell might be on track to make Fed history—for all the wrong reasons. He now risks cutting rates too soon after delaying rate hikes when inflation started to soar. A remarkable achievement in timing, if not the kind he’d want his legacy to hang on.