His remarks targeted the central bank’s recent decision to lower interest rates by 25 basis points. The decision is in direct response to mounting downside risks weighing on job creation in the labor market. At the same time, the U.S. is experiencing a high-growth, high-speculative AI industry, funded almost entirely through fiscal debt.
Powell’s speech was extremely important. It likely represented his last opportunity to interact with the markets before the soon-to-begin blackout period. In fact, financial markets are betting on two more cuts before the end of the year. At the same time, the Fed’s dot plot indicates that the median expectation is in line with those forecasts. Yet, a large majority of experts don’t expect any more cuts to happen this year.
The current economic landscape showcases a weakening labor market primarily driven by supply-side factors, prompting the Federal Reserve to act. Powell emphasized that the decision to lower interest rates is about addressing pressures on the labor market. This market has been facing strong headwinds from many directions in recent months.
“The frontloaded easing path increases the probability of the upside inflation risks materializing,” said Rogier Quaedvlieg, highlighting that the AI boom, which has remained largely insensitive to interest rates until now, is becoming more reliant on debt financing. He highlighted that continued growth could be accelerated by keeping rates low.
Now, as broad monetary easing coincides with expected fiscal easing in the next year, fears of inflation are spurring up. Tariff-induced inflation should the growing economic headwind in 2024. The interplay of these factors calls into question the long-term viability of the economic trajectory the T21 Act has set us down.
Quaedvlieg commented on the current policy stance: “We think policy is currently not as restrictive as the FOMC appears to think, and we think the upside risks to inflation outweigh the downside risks to the labor market.” His insights give voice to a deeper conversation taking place over the fine balance between encouraging economic development and containing inflationary impact.
The Federal Reserve’s approach to interest rates will remain under close scrutiny as markets react to Powell’s remarks and the evolving economic conditions. Analysts are hopeful for a signal of easing inflationary pressure and stronger growth, which would be the opposite of what was foreseen in the last quarterly Global Outlook report.