The US Federal Reserve today opted for a 50 basis point rate cut, a move that manages to avoid the biggest disappointment for markets since 2008, a day after the collapse of Lehman Brothers. Bond investors have been anticipating an aggressive 40 basis point rate cut for weeks, which, complementing the Fed’s usual moves, suggests a 50 basis point cut. If the central bank had opted for a 25 basis point cut, The disappointment regarding investors’ expectations was the strongest since the meeting of September 16, 2008, in which the Fed did not change its rates a day after the collapse of the American bank. If we look at the history of the Fed’s decisions that failed, it was only in 2003 and 2008 that there were surprises bigger than would have occurred today if the Fed had opted for 25 basis points, a scenario that many analysts expected.
The U.S. central bank has been raising expectations of a 50-basis-point rate cut in recent weeks. Fed Chairman Jerome Powell announced at the Jackson Hole central bankers’ symposium in late August that the time had come “to adjust our monetary policy,” and stressed that the agency had taken an important step by starting to focus on defending jobs, a priority that, from that point on, would be ahead of fighting inflation.
The August employment data, released in the first week of September, confirmed the deterioration in the US labor market and convinced investors that the most likely scenario for the Fed would be a 50-point cut in fundamentals. the meeting that took place today. The hope of seeing a rate cut twice as much as normal is what opened the door to a very significant failure by the Fed and a disappointment in the markets as it has rarely done.
Indeed, a few hours before the meeting, Dan Ivascyn, Pimco’s chief investment officer and manager of the largest debt fund on the planet, Pimco Income Fundassessed the possibility that investors had gone too far in their expectations for rate cuts. “We believe that markets have overstated the expected rate cuts” Ivascyn explained, and justifies his opinion, that “in the coming months there are still risks that inflation will accelerate again, which could lead to less significant reductions than what the markets expect,” he explained.
For the moment, the Fed has confirmed that the markets are adjusted to the good scenario, but we will have to wait to see how the macroeconomic data evolve, with inflation and employment as protagonists, to anticipate future rate movements of the American central bank.
The Fed’s Two Big Disappointments
There have only been two previous instances in which the Fed cut rates by at least 20 basis points less than markets expected. That was in 2008 and 2003. In the latter year, the difference between the Fed’s cut and investors’ expectations was 19 basis points, above the 15 basis points that would have been confirmed today if the rate cut had been 25 basis points, not 50.
The biggest disappointment, in 2008, was much bigger and was one of the biggest mistakes in the history of the Federal Reserve. On September 16 of that year, just one day after the collapse of Lehman Brothers, the Fed was scheduled to meet to review interest rates. That meeting began with the market cutting rates by 102 basis points, but to everyone’s surprise, then-Fed Chairman Ben Bernanke announced that rates would not move at that meeting.
Over time, this has been seen as Bernanke’s biggest mistake during the crisis, for focusing too much on the health of the country’s financial sector, and not so much on the health of the real economy. Today, Jerome Powell has shown that he has learned from this mistake.
