US Fed announces major rate cut, but Wall Street wants more

The Federal Reserve cut its benchmark interest rate by 0.5 percentage points (50 basis points) and signaled that further rate cuts would come before the end of the year. It was unclear ahead of yesterday’s meeting whether the cut would be 50 or 25 basis points, after Fed Chairman Jerome Powell announced in late August that rate cuts would begin at the next meeting.

Federal Reserve Chairman Jerome Powell (AP Photo/Jacquelyn Martin)

Ultimately, market expectations have shifted sharply toward 50 basis points in recent days, and Powell has pushed for a deeper cut. The decision was not unanimous, with Fed Governor Michelle Bowman voting for a more modest 25 basis point cut, the first since 2005.

The move is significant given that in July, Powell said the Fed was not even considering a 50 basis point cut.

According to the summary of economic projections, the “dot plot” in which members of the Fed’s governing body indicate where they think interest rates will move, more cuts will occur before the end of the year. In response to a question at his press conference, Powell said that all 19 members of the governing body had forecast “multiple cuts” this year.

In his opening remarks, Powell cited the state of the labor market as the rationale for starting the rate-cutting cycle.

He noted that “the labor market has cooled from its previous overheated state.” Wage gains have averaged 116,000 over the past three months, nominal wage growth has slowed over the past year, and the gap between jobs and workers has narrowed.

“Overall, a broad set of indicators suggests that labor market conditions are now less tight than before the pandemic in 2019. The labor market is not a source of elevated inflationary pressures,” he said.

Powell portrayed the decision as a “recalibration” — he used the word “by one count” nine times.

“With inflation having declined and the labor market having cooled, upside risks to inflation have diminished and downside risks to employment have increased. We now view the risks to our employment and inflation objectives as roughly balanced, and we are mindful of the risks to both parts of our dual mandate.”

The dual mandate is to ensure price stability and full employment.

Most media commentary, drawing on Powell’s remarks, interpreted the decision as the result of the Fed’s fear that continued high interest rates could drive up unemployment and trigger a recession.

In the words of a Wall Street Journal According to the report, the Fed is “now trying to prevent past rate hikes, which pushed borrowing costs to their highest level in two decades last year, from further weakening the U.S. labor market.”

THE The New York Times Fed officials said their “goal is to slow growth enough to ensure that price inflation returns to normal without slowing it so much that the unemployment rate spikes and the economy tips into recession.”

There is probably some truth in these assessments, but it is by no means the main reason for this decision.

This has much more to do with the question of working class wage struggles than with the prospect of a major economic crisis.

If the Fed believed that the recession was necessary to suppress wage demands and strikes through higher interest rates, then it would pursue them.

Powell made this clear with his highly favorable references to Fed Chairman Paul Volcker, who pushed interest rates to 20% in the 1980s, causing the deepest recession and the highest unemployment levels since the 1930s, to suppress wage demands.

At this point, however, the Fed believes it can begin to accommodate Wall Street’s demands for cheaper currency because it believes that wage difficulties, while still slightly higher than it considers necessary, are nevertheless under control.

Although it is never mentioned in official statements, the Fed is well aware that the union bureaucracy is carrying out its task of suppressing the class struggle and imposing sub-inflationary contracts. And this is under conditions where working-class households are being hit by increases in commodity prices that are well above the official inflation figures.

As expected, the Biden administration welcomed the move. In a message posted on Twitter/X, Biden said: “We have reached an important moment: inflation and interest rates are falling while the economy remains strong. Critics have said it can’t be done, but our policies are cutting costs and creating jobs.”

In fact, rising prices continue to degrade the living standards of the working class, the unemployment rate is rising – from 3.7% at the beginning of the year to 4.2% with a further rise expected – and layoffs are increasing.

As expected, Trump denounced the move. “If you cut the budget that much, assuming they’re not just playing politics, the economy would be very bad, or they’re playing politics,” he told reporters.

Similar remarks will no doubt be made in the coming days by both sides. The Fed, however, is not directly beholden to either party. It obeys a higher master, the financial oligarchy of Wall Street.

As an article on Bloomberg noted: “Jerome Powell delivered exactly what Wall Street traders had long hoped for: a sharp interest rate cut that would justify this year’s sharp rally in stocks and bonds as the era of tight monetary policy finally began to reverse.”

But the market reaction was somewhat nervous because, even if the rate cut was welcomed, it was already priced in and the outlook was still uncertain.

Traders expressed concern over Powell’s comments that the Fed shouldn’t be expected to continue making similar 50-basis-point cuts in the future and that the “neutral rate” — which neither stimulates nor restricts the economy — was likely to be higher than before the pandemic. In other words, there would be no return to the essentially free money of the past that Wall Street had become addicted to.

The initial reaction on Wall Street was a rise, but by the end of the day, all major assets, from stocks to Treasuries, corporate bonds and commodities, were down slightly.

Jeffrey Rosenberg, portfolio manager at hedge fund BlackRock, while welcoming the rate cut, said: Bloomberg The result was “a little disappointing compared to what was built in terms of bond expectations.”

Concerns were also raised about what the interest rate cuts indicated about the direction of the economy.

Jack Manley, global market strategist at JP Morgan Asset Management, told the The Financial Times “The situation was very confusing” and the macroeconomic data “are not as clear as we would have liked.”

The job market, he said, “has started to decline” and “to me that’s not a good sign.”