Experts said the decision reflects the Fed's concerns about the weakening job market. Despite the rate cut, a soft landing for the U.S. economy is uncertain, with experts suggesting it may take two to three quarters for growth to rebound.

 

by Xinhua writers Xiong Maoling, Hu Yousong

 

WASHINGTON, Sept. 20 (Xinhua) -- The U.S. Federal Reserve has announced that it will slash the target range for the federal funds rate by 50 basis points, marking the first rate cut since March 2020 and signaling the start of a monetary policy easing cycle.

 

Instead of implementing a 25-basis-point cut, the Fed opted for an unusually large 50-basis-point reduction, indicating its confidence in the downward trend of inflation and highlighting its concerns about the weakening job market, analysts noted.

 

Whether this larger-than-typical rate cut can stabilize the slowing job market and mitigate potential risks to the U.S. economy remains to be seen. A soft landing isn't a done deal.

 

WHY GO BOLD?

 

When asked about this "larger-than-typical rate cut," Fed Chair Jerome Powell acknowledged at a press conference Wednesday that it's "a strong move" while noting that "we don't think we're behind. We think this is timely."

 

Some former Fed officials and economists had previously called for the U.S. central bank to take rate-cutting action at its July meeting.

 

Analysts noted that the Fed usually kicks off the easing cycle with a standard 25-basis-point rate cut, while a 50-basis-point reduction typically occurs during emergencies, such as during the COVID-19 pandemic in 2020 and the international financial crisis in 2008.

 

"I think the Fed made a mistake by not cutting interest rates in July, and the ongoing deterioration in the labor market since then means that the Fed -- an inherently risk-averse institution -- will opt for the 'safer' 50bps rate cut to manage the risk of an ongoing slowdown in job creation," said Matt Weller, global head of research at StoneX Retail.

 

Ryan Sweet, chief U.S. economist at Oxford Economics, wrote in a note that the Fed doesn't like to admit policy errors, but some of the decisions for a larger cut in September are likely to get caught up as the central bank found itself "behind the curve by one meeting."

 

The Wall Street Journal reported that Fed officials considered but ultimately decided against lowering interest rates at their meeting in late July, noting that an unemployment report released two days later showed a significant rise in joblessness.

 

"While central bankers don't get mulligans, they might have opted for a cut if that (unemployment) data had been in front of them at the July meeting. A larger cut this week offered the chance to reset," the article said.

 

Some, however, also believe that the Federal Reserve had good reason to delay the action.

 

Brookings Institution Senior Fellow Barry Bosworth told Xinhua that a 50-basis point cut is "justified." "The prior delay was reasonable as they waited for confirming evidence of a slowing of the economy and inflation," he said.

 

LABOR MARKET IN TROUBLE?

 

In any case, the Federal Reserve's substantial rate cut underscores the urgency of action. "I think you can take this as a sign of our commitment not to get behind," Powell told reporters.

 

At the press conference after the two-day Fed meeting, many questions focused on the job market rather than inflation, highlighting that signs of weakness in the job market have become a focal point of concern.

 

How is the U.S. labor market? Powell indicated that the job market has slowed but remains "in solid condition." The unemployment rate in August was 4.2 percent, and while it shows an upward trend, it remains low.

 

Despite that, there have been some signs of softening in the job market.

 

A report released by the Labor Department in August noted that monthly employment reports had overstated job growth for the 12 months ending in March. Employers actually added an average of about 174,000 jobs per month, compared to the previously reported average of 242,000, suggesting the labor market was weaker than initially thought.

 

The latest data showed that the average monthly job growth over the past three months was 116,000, a significantly slower pace compared to earlier this year. Meanwhile, the unemployment rate of 4.2 percent in August was the highest in nearly three years.

 

Dean Baker, a senior economist at the Center for Economic and Policy Research, previously told Xinhua, "It is important to remember the Fed has two mandates. It can't wait until it is 100 percent certain that inflation is back at target. It has to keep in mind its full employment mandate."

 

"Unemployment is not high, but it almost certainly could be somewhat lower, and there is a real risk it will rise further in the rest of this year," said Baker.

 

According to the Fed's latest quarterly summary of economic projections released Wednesday, the median unemployment rate among Fed officials is projected to be 4.4 percent by year-end, up from 4.0 percent in the June projection.

 

An article by Politico argued that the move -- which is twice as large as a standard rate cut -- indicates that officials believe they are winning the battle against inflation and also signals that the central bank is "growing nervous" about the weakening labor market.

 

"While layoffs remain low, job opportunities have dwindled, helping to gradually push up unemployment," the article said.

 

WHAT'S NEXT?

 

Beginning in March 2022, the Fed raised rates 11 consecutive times to combat inflation not seen in 40 years, pushing the target range for the federal funds rate to between 5.25 percent and 5.5 percent, the highest level in over two decades.

 

After the Fed's action on Wednesday, the target range for the federal funds rate is between 4.75 percent and 5.00 percent.

 

Powell noted that the 50-basis-point rate cut should not be viewed as the Fed's new pace of rate cuts. It will carefully assess each meeting and make new decisions based on the circumstances. "We are not on any preset course," he said.

 

The newly released dot plot -- where each Federal Open Market Committee participant sees the fed funds rate heading -- shows that nine out of the 19 members expect the equivalent of 50 more basis points of cuts by the end of this year, while seven members expect a 25 basis point cut.

 

The Chicago Mercantile Exchange Group's FedWatch Tool, which acts as a barometer for the market's expectation of the Fed funds target rate, showed that as of Thursday, the probability of the Fed cutting rates by 25 basis points at the November meeting is over 60 percent.

 

When asked about the prospect of a recession, the Fed chair told reporters at the press conference that he didn't see anything in the economy suggesting an elevated likelihood of a recession or a downturn.

 

GLOBAL CONCERNS

 

But a soft landing isn't a done deal.

 

Some believe that after the first rate cut, economic growth may take two to three quarters to rebound, making it too early to determine whether the U.S. economy can ultimately avoid a recession.

 

According to an article by The Hill, the next few months are "critical" as the central bank attempts to bring the economy in for a "soft landing," maintaining its dual mandate of low inflation and maximum employment as it lowers rates.

 

David Rosenberg, a former chief North American economist at Merrill Lynch, told MarketWatch that the Fed moving 50 basis points was an acknowledgment that it had stayed "too tight for too long," adding that he doesn't believe the Fed will move aggressively or urgently enough to keep the U.S. economy out of recession.

 

GfK's Consumer Confidence Index, the longest-running measure of consumer confidence in Britain, fell by seven points to minus 20 overall since the end of August, following the aftermath of the Bank of England's rate cut. British people's view of their finances in the future has also gone negative again, down nine points to minus three, according to a BBC report.

 

According to a Chosun report on Friday, some experts caution that this rate cut cycle may not boost the South Korean stock and real estate market as hoped since it comes amid domestic economic stagnation.

 

In Japan, data from the U.S. Commodity Futures Trading Commission showed that as of Sept. 10, the market's bullish sentiment on the yen rose to its highest level since March 2021. Some analysts believe that if the Fed continues to cut interest rates, the yen may strengthen further, putting pressure on export-dependent Japanese companies.