Pivot

“Pivot” feels like a fitting word for the past week’s Fed events. After a multi-year run of hikes starting mid-2022, the Fed made its much anticipated first rate cut. Somewhat of a surprise was the magnitude. Instead of a safer 25 bps drop to kick things off, the Fed took a bolder 50 bps move. The bigger than anticipated drop reflects shifts in labor market data following the Fed’s last FOMC meeting in July ‘24.

Since then, labor strength has shot to the forefront of the Fed’s concerns. This change, in what we’ll call the other notable “pivot”, is relief from the incessesant inflation chatter dominating headlines since 2021. With inflation on the downtrend, and labor market cooling, the Fed’s positioning this week appears justified. Perhaps one part inflation recognition, and the other part getting ahead of labor softening. Maybe that explains the need for 50 bps? But after 13-month of a steady Fed Funds Rate, coming down 50 bps for the first drop also smells like a tinge of panic / urgency. Maybe the Fed sees something bigger in the cards not visible to the rest of us?

Both in 2001 and 2007, for different reasons, recession soon followed after the Fed started cutting rates. While markets applauded this week’s aggressive 50 bps cut and “soft-landing” became the media’s victory cheer, you can’t help but wonder if it’s different this time.

We’re all still sorting through the combined effects of COVID, helicopter money, historic gov’t debt, 40-year high inflation, the great resignation and one of the steepest Fed rate hike paths in history. Can the Fed really set effective policy with such dynamic, rapidly-changing variables currently at play in our economy?

And then there’s this crazy inflation pivot. Has inflation really been killed or is it more of a numerical victory as year-over-year comparisons play out favorably? Given the severity of the inflation spike, and the related shockwaves still making their way through our post-COVID economy, it’s hard to imagine the once-raging inflation beast would die with such a quiet whimper. Has victory been declared too soon?

And finally, how convenient to deliver a big rate cut 2-months ahead of the upcoming presidential election? It’s no secret that managing politics has quietly become the Fed’s third mandate. Could politics outweigh economic data?

Soft landing after all this, I hope so, but reasons abound to be skeptical.