“We don’t think we’re behind. But you can take this as a sign of our commitment not to fall behind.” : This is how Jerome Powell, Chairman of the Federal Reserve, justified his decision to sharply lower the key interest rates of the American central bank, following the meeting of his monetary policy committee. A clear reduction, the first since the Covid-19 pandemic in early 2020, while American short-term interest rates were until now set in a range between 5.25% and 5.5%, their highest level since 2006. They will now be between 4.75% and 5%.
Many operators were counting on a moderate drop of 0.25 points: because the Fed wants to be predictable; because it did not want to show that it was panicking in the face of the deterioration of the labor market; because it does not want to let go too quickly despite the decline in inflation; because it does not want to be accused of favoring the Democratic administration at this meeting, the last before the presidential election.
Finally, in about ten days, it was the other scenario that prevailed, as the reporters of the Wall Street Journal, who are by far the best informed about the Fed. Several reasons presided over this decision: first, the last meeting in July had been followed by a bad unemployment figure, suggesting in retrospect that the institution should have moved this summer, as Harvard economist Jason Furman had estimated. Furthermore, even with key rates reduced by half a point, American monetary policy remains restrictive with the decline in inflation, which fell back to 2.5% over twelve months in August. For the record, it had reached a record of 9.1% in June 2022. Finally, the American institution undoubtedly considered that independence implied doing what must be done, and not being paralyzed by electoral deadlines, as the Wall Street Journal.
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Financial Markets Perplexed
The fact remains that this half-surprise left the financial markets perplexed: should we welcome the drop in rates, which facilitates the recovery of the economy, or worry about a possible recession? Yo-yoing between red and green, Wall Street ended the day with a drop of 0.3 points for the Nasdaq and the S&P 500, which had returned to its record level reached before the turbulence of the summer, caused precisely by the bad unemployment figure. Ten-year rates now stand at 3.7%, well below the 5% briefly crossed in October 2023.
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