While the US economy is surging forward, the Federal Reserve is like a headless fly, making random adjustments to interest rate policies! Last month, they suddenly lowered the interest rate by half a percentage point, and the benchmark interest rate dropped directly to the range of 4.75%-5%. They explained that this was because inflation had dropped a bit and employment growth had slowed down a bit, so a "major policy adjustment" was needed.
But now, the Fed is hesitant again and dare not cut interest rates easily. Why? Because the inflation data is sometimes good and sometimes bad, and the economy looks quite strong. They are completely confused and don't know what to do. Christopher Waller, a senior official of the Federal Reserve, said yesterday that we have to be cautious now and not act in a hurry.
Waller admitted that inflation is like a roller coaster, and it has not stopped for a year and a half. Although they want to reduce the inflation rate to 2%, many prices are still high, which is really a headache. However, Waller thinks that the recession is still early, the labor market is still "good", and economic activity has not slowed down much. The Fed wants to have a "neutral" policy, neither stimulating nor suppressing the economy, but they are definitely not in a hurry.
Waller's comments coincide with those of John Williams, president of the New York Fed, who said there could be two more rate cuts this year, each by a quarter percentage point. The central bank's forecast also matches Williams' "rosy blueprint," with plans to cut interest rates twice more by the end of the year to bring the benchmark rate to a more neutral level.
But this is still controversial. Neel Kashkari, president of the Minneapolis Federal Reserve, also joined in the fun, saying that the central bank might consider another "small cut". But he also said that it depends on the data.
The Fed will have to deal with a host of uncertainties in the coming weeks, including hurricanes in the southern United States, a strike at Boeing's factory and an upcoming jobs report, which will be released just days before the U.S. presidential election and could roil the labor market.
Waller predicted that the report would likely show job losses that were "significant but only for a while," and that the next set of data could show a loss of more than 100,000 jobs. But he was still confident that the Fed could achieve its 2% inflation target while maintaining a strong labor market.
Williams also echoed: "The job market is fine, inflation is falling, and our policies are good and can guide things in a good direction." But some people are not buying it. Some economists are beginning to question whether the Fed's interest rate policy (and its necessity) is important. They think that the central bank is just following the market and can't push for any meaningful changes.
Aswath Damodaran, a finance professor at New York University, said that the short-term interest rate of the federal funds rate has little impact on the really important interest rates (such as mortgages, commercial loans, and corporate bonds). He also cited an example that from 2004 to 2006, the Fed raised interest rates by more than 4%, but the yield on Class B bonds rose by less than 1%, and the market did not pay any attention to the Fed at all.
Damodaran believes that the market trend still depends on real economic factors such as economic growth expectations and inflation, rather than the Fed's policies. Spencer Jacob of Wall Street is even more outrageous. He compared Fed Chairman Jerome Powell to the wizard in "The Wizard of Oz", saying that the Fed's control over the stock market is more of a legend than a reality.
Powell’s decision to cut interest rates in 2007 did initially boost stock prices, but recession hit within a few months, proving the Fed’s limited influence.
So, has the Fed lost control or has it lost touch with the market? David Kostin, a strategist at Goldman Sachs, said that in a rate-cutting cycle, the economy is the main driver of the market, and the Fed is more like following. This view is becoming more and more popular. Damodaran concluded: "The Fed follows the market, not the other way around."
If that happens, investors may have to pay less attention to central bank actions and more attention to economic fundamentals. Last year, many investors were scared away by the fear of over-tightening.
But if they ignore the Fed's interest rate hikes and only look at economic data and corporate profits, they may be able to stay in the market and make a fortune when the market recovers!
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