Investing.com — The Fed’s decision to start its rate-cutting cycle with a massive cut in September, despite its view that the economy is healthy, looks like another policy mistake as current strong demand could rekindle inflationary pressures.
“The risk is that the Fed will have to reverse its rate cuts later this year or in 2025, as it did in 2021,” MRB Partners said in a note published Thursday, amid concerns the Fed may be underestimating the strength of the economy and inflation.
The Fed cut rates by 50 basis points on September 18, marking the start of its easing cycle and the first reduction since March 2020. It also indicated it could make two more 25-basis-point cuts this year and a 1-percentage-point cut next year.
According to MRB Partners, This massive reduction is “very unusual” compared to cycles previous of rate reduction , when the NBER’s business cycle indicators showed much weaker trends.
There recognition by the president of the FedJerome Powell, that “the American economy is in good shape… and that the labour market is “solid”, was also at odds with the decision to carry out a larger reduction, the research firm added.
The Fed’s aggressive decision is premature, given the resilience of the US economy.
Consumer spending remains robust, supported by a strong jobs market and rising real incomes, the research firm said.
Several factors could fuel persistent inflation, including tight labor markets that are driving wage growth, ongoing supply chain challenges, geopolitical tensions that are affecting commodity prices and the lingering effects of fiscal stimulus, the firm added.
The backdrop of persistent inflation, driven by strong demand, could potentially complicate the Fed’s efforts to manage price stability while supporting economic growth.
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