Economists disagree whether Fed’s oversized rate cut was ‘surprise’ of the decade

The Fed cut interest rates by 0.5% on Wednesday. Some economists say it was a surprise, yet others believe it was telegraphed
By Sam Bourgi
•
19 September 2024
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economists

According to The Kobeissi Letter, the Federal Reserve’s decision to lower interest rates by 50 basis points on Wednesday “marked the most surprising Fed decision since 2009.”

While the decision caught many by surprise, economist David Rosenberg said the writing was on the wall as early as Sept. 4.

“If you didn’t think the Fed would go 50 today, you didn’t read the latest Beige Book,” Rosenberg wrote.

Rosenberg was referring to the latest Beige Book publication, which provides a summary of economic activity across the Fed’s 12 districts.

The latest Beige Book report showed that economic output had stagnated or declined in nine of the Fed’s 12 districts. In other words, “We are up to three-quarters of the economy either stagnating or contracting,” said Rosenberg.

Economists at Bank of America said an oversized rate cut would come as a surprise, but not in a negative way.

“The Fed typically only surprises the market in a dovish direction,” the strategists said in a note before Wednesday’s announcement.

“The Fed generally likes hawkish signals to be well telegraphed so as to not surprisingly tighten financial conditions,” they wrote.

In other words, policymakers are only comfortable with larger moves when they’re cutting interest rates, not raising them.

Bloomberg economist Anna Wong said the direction of fed fund futures prices before Wednesday’s decision all but confirmed the central bank’s plan for an aggressive cut.

“If these odds continue to swing in favor of 50 [basis points] on Monday and the gap opens up [...] I think we have an answer,” she wrote in reference to the CME FedWatch Tool, which showed a growing probability of a 0.5% reduction.

Stepping in before it’s too late

In a press conference following the FOMC meeting, Fed Chair Jerome Powell said he believed the economy was in good shape and that the rate cut was “designed to keep it there.”

He also cautioned investors against expecting larger rate cuts in the future.

“I do not think that anyone should look at this and say, ‘Oh, this is the new pace,’” said Powell.

Although the U.S. economy continues to grow at a steady pace, concerning trends have emerged in recent months.

Hiring has slowed significantly from its post-pandemic peak, unemployment is considerably higher than it was at the start of the year, and more businesses report weakening consumer spending.

Some of the country’s largest lenders have also warned that more lower-income households are sliding into delinquency on their credit card and auto loans.

Meanwhile, some economists have argued that the Fed’s policies have contributed to Americans’ financial misery, so it could take a while before rate cuts work their magic.

For example, Nobel Prize-winning economist Joseph Stiglitz recently complained that the federal funds rate is much higher than it should be. Rather than fix inflation, this policy made inflation much worse because it prevented housing prices from coming down.

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