The Federal Reserve recently approved to cut interest rates by a quarter percentage point after a relentless prices fight for the past two decades. The Sept. 18 walk by the central banks was bolder than some investors expected.
In response to the COVID-19 epidemic epidemic, the Fed’s primary rate cut since the collapse of the world in March 2020 sparked a wave of joy in the equity markets. Investors were pleased with the supersize level cut as proof that the gallows of the previous two years of limiting economic policy are over.
However, if you read the text carefully, Fed Chairman Jerome Powell and his fellow members are not imposing any immediate measures to protect businesses from themselves. In fact, the Fed has slowly won its conflict in the years-long conflict between the Fed and an investment course that is dependent on the quick money of the 2008-2022 period. It has mostly been done by forging ahead on almost precisely this course a little less than a year ago while ignoring the needs of both Wall Street and Washington, D.C.
The Fed announced at its last meeting of 2023 that it would reduce rates three times for a full of 75 basis points, but investors guessed more than half as many breaks would start in the first fourth of 2024. In fact, the Fed has only ever stayed true to its initial intentions. The central banks will score the headlines for inflation lowering, but it’s once more slowly urging prudence.
According to the Report of Economic Projections from September, almost half of the Fed’s voting people still think rates will only be cut once more this year, bringing the total 2024 breaks to 75 basis points, which is what it had predicted late last month. The SEP predicts a median interest rate of 3.4 % by the end of 2025, which is close to the 3.6 % of the final 2023 SEP projected for the end of 2025, despite a flimsy majority of people saying it will cut twice as much.
The Fed has also maintained its accuracy and consistency in its forecast that long-run interest rates will eventually reach 2.9 %, far beyond what was once assumed as the default neutral interest rate. Powell reaffirmed this in his postmeeting press conference, reiterating that during the Zero Interest-Rate Policy era,” the neutral rate is probably significantly higher than it was back.”
Most importantly, the Fed is n’t done. The central bank also promised to continue undo its balance sheet by “reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities,” in addition to Powell’s usual caveats that the Fed is still data-dependent and committed to inflation falling below its 2 % target in the long run.
In other words, quantitative tightening is far from over, and even when it is, a return to ZIRP seems highly unlikely.
Politicians on both sides of the aisle have been vying to spin the Fed’s decision for the greatest possible partisan advantage, but the Fed has remained so closely to the script that it’s difficult to imagine either side succeeding in claiming that monetary policy rigged the 2024 election. Early voting had already begun in lynchpin swing states like Pennsylvania, with five more states beginning before the month’s end, let alone by the time Powell announced the September rate cut, let alone by the time it even trickled down to lower credit card APRs and mortgage rates.
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It’s not the Fed has played its part perfectly. Far from it, the Fed’s involvement in the bipartisan coronavirus spending spree in 2020 and its refusal to cut off President Joe Biden and Kamala Harris in 2021 are the cause of the economy’s worst inflationary crisis in 40 years in the first place.
But by its narrow definition of success, the Fed might have pulled off the impossible, and by that, I do n’t mean balancing full employment with basic price stability. It’s too soon to say that it has achieved a soft landing, but as far as evading blame from Washington, D. C., and Wall Street, Powell has gotten his greatest wish: insulting the Fed from the institutional blame game of 2024.
