Rate Cut: Is the Fed About to Make a Grave Mistake?

The American Federal Reserve (Fed) is in the spotlight as it prepares to begin a new phase of rate cuts. This first reduction, scheduled for September 18, seems inevitable, but it is the extent of this cut that intrigues investors and sparks speculation on the stock market. Is it a sign of a panicked Fed, or a more measured strategy in response to current economic uncertainties? Decryption.

The Fed Facing a Delicate Turning Point

Since the Jackson Hole meeting in August, the Fed has clearly paved the way for what looks like a major shift in its monetary policy.

After raising rates by 500 basis points between March 2022 and July 2023 to contain runaway inflation, the time now seems to be for easing. But it is not the decision itself that worries the stock market, it is what it could mean.

Indeed, the rate cut could respond to two very different scenarios. On one hand, the Fed could simply be looking to accompany a natural economic slowdown.

On the other hand, it could act out of fear of an imminent recession. This ambiguity worries the markets, used to a cautious Fed, but which, this time, could well be pushed to make more radical decisions.

A 50 basis point cut in September, for example, would be perceived as a desperate measure, even a “panic mode.” A move that, historically, has only been used in response to major crises, like the Covid-19 pandemic.

The Markets on the Razor’s Edge

This climate of uncertainty is palpable on the stock market. According to analysts, a rapid rate cut could have immediate consequences on risky assets, notably stocks, which are a central pillar of American household wealth.

If a 50 basis point cut is considered, it could lead to increased volatility in the stock markets, as investors would see it as a sign of a deeply troubled U.S. economy.

Uncertainty also hangs over the job market, which has become the new center of attention after a long period where inflation dominated economic debates.

The numbers are unclear, difficult to interpret, notably due to the diversity of sources and the influence of immigration on the labor market.

Some observers believe that an increase in the labor supply could slow the rate cuts, as it makes aggressive Fed action less urgent.

However, critical voices are emerging, claiming that the Fed has already acted too late. According to them, the central bank is playing a losing game, and a 50-point cut in September would be merely a catch-up rather than a real long-term strategy.

A Risky Bet for the Fed

Despite these uncertainties, there is no doubt that the September meeting will mark an important turning point for the Fed. A significant rate cut risks compromising its credibility and would be perceived as an admission of failure in managing inflation and the economic slowdown.

Conversely, a more moderate reduction could be interpreted as a prudent measure, aiming to calm tensions without causing panic.

It is also important to note the political aspect of this decision. With the presidential elections approaching, any drastic maneuver could be poorly received, both by the stock market and by policymakers.

This is why some experts advocate a more measured cut, spread over several months, which would allow the Fed to retain some flexibility while reassuring the markets about its ability to navigate an uncertain period.

In conclusion, the Fed is at a crossroads, between caution and action. The next meeting on September 18 promises to provide key indications on the state of health of the U.S. economy and on the Fed’s ability to adapt to an increasingly uncertain economic context.

Investors, meanwhile, are hanging on to every word and gesture, trying to decipher the signals of a central bank under pressure. Meanwhile, the reign of Bitcoin is asserting itself.