US Federal Reserve cuts interest rates by 50 bps

Fed cuts rates for first time since March 2020, says “risks to employment and inflation goals roughly in balance.”

19 September 2024

The Federal Reserve (Fed) on Wednesday loosened monetary policy by fully 50 basis points (bps) to a 4.75-5% range in one go, marking the start of what many see as a cycle of interest rate cuts designed to support the US economy as inflation settles back down to its 2.0% target.

It is hard not to detect a whiff of unnecessary panic here. US unemployment remains at 4.2%, which is low by the standards of the last three decades. The latest non-farm payrolls report was also fairly robust at 142,000 job additions for the month of August, with average hourly earnings growing at a 3.8% clip year-on-year. Labour participation has been growing too, suggestive of a swelling labour market pulling in new workers. Retail sales have stabilised and confidence, as measured by the Michigan survey, has been on a rising trend since June 2022. All this suggests that the US economy looks set fair for the vaunted soft landing anyway, in turn implying that high interest rates were doing little to slow things down in the first place. Why so? Capital-intensive sectors of the US economy such as heavy industry have faded over time amid offshoring and lower labour intensity. And US stockmarkets are increasingly dominated by highly cash-generative technology businesses for whom high interest rates have been an added bonus rather than a headwind. So US consumers are less exposed to the constricting aspects of higher interest rates than they used to be.

This leads to the slightly unsettling question of what monetary policy is actually for in today's evolved US economy and market ecosystem? For the Fed, the prospect of managing the economy with outdated tools is not something they are willing to contemplate, but should the incoming economic data continue to be benign over the coming weeks, there will surely be a case to answer.