The Fed Seems to Have Erroneously Implemented Its Significant Rate Cut

The proliferation of robust economic indicators, alongside an economy exhibiting sustained momentum, has prompted scrutiny among experts regarding the Federal Reserve’s decision to implement a substantial rate cut.

Having traversed the culmination of the Federal Reserve’s unprecedented rate-hiking cycle, the U.S. economy remains buoyant, raising queries about the necessity of September’s aggressive rate reduction.

Recent data has invigorated discussions about whether the central bank’s significant 50-basis-point cut was warranted:

• September retail sales exhibited a commendable increase of 0.4 percent compared to August.
• Revisions have suggested that consumer expenditure figures were underestimated.
• Notably, weekly applications for unemployment benefits unexpectedly declined, undeterred by the impact of hurricanes and labor strikes.

Analysts at Yardeni Research articulated their perspective succinctly, asserting, “Today’s data fortify our belief that the Fed’s stance was excessively accommodating during the rate cut on September 18.”

In light of the Fed’s initial rate reduction, the Yardeni team subsequently elevated their equity forecasts and anticipated a rise in bond yields—predictions that have materialized post-announcement.

Stock markets are consistently achieving record highs, with the yield on the 10-year U.S. Treasury reaching approximately 4.10 percent, a half-percentage point increase since the Fed’s intervention. Wall Street appears to be pricing in the anticipation of even lower borrowing costs, which has led analysts to project that stocks will maintain their upward trajectory.

CME data corroborates this optimism, indicating a 90 percent probability of a subsequent 25-basis-point cut on November 7, with a roughly 75 percent likelihood of a similar movement in December.

Adding to the complexity of the Fed’s recent maneuverings, the Atlanta Fed’s GDPNow model has adjusted its third-quarter GDP projection from 3.2 percent to 3.4 percent. Earlier this month, I revisited this topic with Gene Goldman, Chief Investment Officer at Cetera Investment Management, who contended that the Fed’s aggressive action was unwarranted:

“The Fed’s rapid rate cuts introduce a significant risk to our currently favorable economic landscape; excessive reductions too quickly may undermine stability,” Goldman articulated.

Notably, while economic data appears robust, sentiment among the general populace remains tepid. A recent University of Michigan consumer sentiment survey discovered an unexpected decline, reflecting apprehensions about escalating prices and sustained inflation, which stands in contrast to the encouraging retail sales figures for the same period.

Economist James Knightley from ING observed, “Consumers may harbor doubts regarding the economic forecast, yet they continue to engage in spending. While financial strains are mounting for numerous households, robust consumption patterns among higher-income individuals are mitigating concerns, implying that the Fed will likely proceed with caution regarding future 25-basis-point cuts.”