Interest rates reduced, yet investment markets remain turbulent due to discernible apprehension signaled by the Federal Reserve.
The Federal Reserve Resumes Interest Rate Cuts Amidst Economic Uncertainty
The Federal Reserve (Fed) has resumed its interest rate cuts, lowering the policy rate by 25 basis points to a range of 4%-4.25%. This move comes amidst growing concerns about the U.S. stock market today, with unemployment climbing to 4.3% and payrolls growing less than expected.
In its latest meeting, the Fed's shift to easing was being scrutinized due to pressure from the U.S. President Donald Trump's administration. Jerome Powell, the new member of the Fed committee who joined on Tuesday, September 10, was the only one opposing the quarter-point interest rate cut, instead advocating for a half-point cut. Stephen Miran, Trump's nominee and economic adviser, registered a dissent for a bigger half-point reduction in the Fed's rate cut decision.
The Fed's updated quarterly economic projections reflect expectations of more easing this year. The Fed's projections still put inflation ending this year at 3%, above its 2% target. This has sparked fears of stagflation, a mix of sluggish growth and high inflation, due to the increase in inflation seen in August, which was the biggest year-on-year increase since January. Higher costs for housing and food contributed to the increase.
Despite the Fed's comments dampening market optimism, the Nasdaq and the S&P 500 closed lower in choppy trading on Wednesday following the Fed's meeting. The Fed's 'dot plot' showed a wide variety of forecasts for the year-end rate, with one participant penciling in a 4.4% year-end rate, above the new 4.00%-4.25% range. At the other end, one policymaker marked down a year-end policy rate of 2.9%.
The Fed's decision to resume interest rate cuts comes as the labor market shows signs of slowing down. A steep downward revision to benchmark jobs figures for the year through March added weight to the view that the labor market is losing steam. The Fed signaled a gradual easing cycle in response to these mounting labor market concerns.
Treasury yields rose following the Fed's decision, with two-year yields up four basis points and benchmark 10-year yields up by about seven basis points. The Fed's projection for economic growth was slightly higher at 1.6%.
In conclusion, the Federal Reserve's decision to resume interest rate cuts reflects growing concerns about the U.S. stock market today, particularly the labor market. The Fed's projections for inflation and economic growth, as well as the wide variety of forecasts for the year-end rate, indicate a complex and uncertain economic outlook.
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