Did the Fed hit the brakes too hard? Analysts say not likely

Moody's analyst Martin Wurm calls the Fed's dramatic rate cut a "proactive approach" to managing inflation and the job market
By Meagan Faryna
•
30 September 2024
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Fed Chair Jerome Powell

The Fed's half-point rate cut is yet another proof that policymakers have achieved the elusive "soft landing," analysts say.

According to Martin Wurm, director at Moody's Analytics, the Federal Reserve's recent rate cut reflects a "proactive approach to managing inflation and the evolving labor market.”

"Inflation has nearly returned to target levels, allowing the Fed to implement this strategic cut," said Wurm.

This marks the first substantial cut since Covid began and the first of this magnitude since the 2008 financial crisis. The dramatic cut has raised concerns about a potential recession.

Fed Chair Jerome Powell addressed these concerns at a press conference following the meeting. He emphasized there were no signs of an imminent recession, given the strength of the job market and the overall economy.

"With energy prices stabilizing and the effects of the pandemic fading, the time is right for the Fed to normalize its approach," said Wrum.

The stock market reacted positively to the news.

The Dow Jones Industrial Average climbed over 1%, while the S&P 500 also achieved historic highs. Futures markets are already pricing in additional hefty rate reductions for the Fed's remaining meetings this year.

Half-point rate cuts of the past

If your jaw dropped at the half-point rate cut, it’s probably because it’s been a while.

In 2001 and 2007, the Fed cut rates by 50 basis points after prolonged periods of higher rates. Unfortunately, those cuts weren’t enough to stave off a recession.

"On all the recent occasions when the Fed has accelerated up to 50bp cuts, bad things have then happened," says Jim Reid, lead research strategist at Deutsche Bank.

However, Reid says to take that with a grain of salt.

"Correlation isn't causation, and it's hardly like the Great Financial Crisis only happened because the Fed opened with 50 bps."

Deutsche Bank analysts say 2024 is a whole different ball game, due to the complexities of the economy post-pandemic and persistent inflation. In other words, the Fed has to pull off the balancing act of a lifetime.

Despite historical precedents, many economists remain optimistic.

"Recession alarm bells should sound a bit muted with an encouraging employment report, solid gains in retail sales, and a rebound in industrial production easing fears of an economy on the precipice of a downturn,” said Matthew Martin, US Economist at Oxford Economics.

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