Big Fed Rate Cut Gamble Risks Policy Mistakes, Resurgent Inflation By Investing.com

Investing.com — The Fed’s decision to kick off its rate-cutting cycle with a jumbo cut in September despite the economy being in good shape has all the makings of another policy blunder, as strong demand in course may reactivate inflationary pressures.

“The risk is that the Fed will have to back down on rate cuts later this year or in 2025, similar to the policy error made in 2021,” MRB Partners said in a note on Thursday, amid concerns that The Fed underestimates the strength of the economy. and inflation.

The Fed offered a rate cut of 50 basis points on September 18, marking the start of its easing cycle and the first cut since March 2020. The Fed also signaled that it may make two more 25 basis point cuts this year and a reduction of one percentage point next year. .

Jumbo cutting it was “very unusual,” says MRB Partners, compared to past rate cuts cycles, when the NBER’s business cycle indicators were trending much weaker.

EDF Chairman Jerome Powell acknowledged that “the US economy is in good shape… and the labor market is in a “strong place,” was also at odds with the decision to deliver a higher cut, the research firm added.

The Fed’s aggressive move is premature given the resilience of the US economy.

Consumer spending remains robust, supported by a strong labor market and rising real incomes, the research firm said.

There are several factors that could fuel persistent inflation, including tight labor markets driving wage growth, ongoing supply chain challenges, geopolitical tensions affecting commodity prices and lingering effects of fiscal stimulus measures, the firm added.

The backdrop of persistent inflation, driven by strong demand, could complicate the Fed’s efforts to manage price stability while supporting economic growth.