“We don’t think we’re late. But this can be taken as a sign of our commitment not to be left behind.” : This is how Jerome Powell, chairman of the Federal Reserve, justified his decision to drastically lower the official interest rates of the American central bank, after the meeting of its monetary policy committee. A clear drop, the first since the Covid-19 pandemic at the beginning of 2020, while American short-term interest rates were until now in a range between 5.25% and 5.5%, that is, their highest level since 2006. They will now be between 4.75% and 5%.
Many traders were counting on a moderate 0.25 point drop: because the Federal Reserve wants to be predictable; because it does not want to show that it is panicking over the deterioration of the labor market; because it does not want to give in too quickly despite the fall in inflation; because it does not want to be accused of favoring the Democratic administration during this meeting, the last before the presidential elections.
Finally, within about ten days, the other scenario emerged, as the reporters of the wall street journal, who are by far the best informed about the Federal Reserve. Several reasons led to this decision: first, the last meeting in July was followed by a bad unemployment figure, which suggests in retrospect that the institution should have changed this summer, as Harvard economist Jason Furman had estimated. Moreover, even with key rates cut by half a point, US monetary policy remains restrictive with inflation falling, which fell to 2.5% over twelve months in August. For the record, it reached a record 9.1% in June 2022. Finally, the American institution undoubtedly considered that independence meant doing what needs to be done, and not being paralyzed by electoral deadlines, as it claims. Wall Street Journal.
Perplexity of financial markets
Still, this semi-surprise left financial markets perplexed: should we welcome the drop in rates, which is facilitating the recovery of the economy, or should we worry about a possible recession? Switching between red and green, Wall Street closed the day with a 0.3 point drop for the Nasdaq and the S&P 500, which had returned to its record level reached before the summer turmoil, caused precisely by the poor unemployment figure. Ten-year rates are now at 3.7%, well below the 5% that was briefly exceeded in October 2023.
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