The interest rate was cut last month, but you’re regretting it this month?
Huh? What's going on?
I remember when the Federal Reserve just announced a 50 basis point rate cut last month, the market was still jubilant. How come less than a month later, Wall Street has already started to "regret"?
With this question in mind, I read the report carefully and found that things were far more complicated than I had imagined.
It turns out that after the Federal Reserve cut interest rates by 50 basis points last month, the latest non-farm payrolls data was unexpectedly strong.
The number of new non-farm payrolls in September reached 254,000, far exceeding the market expectation of 140,000.
Not only that, the non-farm payrolls data for July and August were also revised upwards. July was revised up from 89,000 to 144,000, and August was revised up from 142,000 to 159,000.
What does this mean? It means that the U.S. job market is much stronger than we thought.
The unemployment rate also fell to 4.1%, lower than the expected 4.2%.
When I saw this set of data, I couldn't help but gasp.
No wonder Wall Street experts are beginning to "regret". This is not an economy that needs a rate cut! It is clearly a booming and vibrant economy.
I can't help but think of the situation at this time last year. At that time, everyone was worried about the economic recession and high inflation. What about now? The economy is still strong and inflation is gradually falling.
This reminds me of an old saying: "It is the job of economists to explain why their predictions were wrong."
It seems that this time it is the turn of the Federal Reserve and Wall Street experts to explain.
I read on and found that Wall Street experts gave several reasons why they thought the September rate cut was a mistake.
The first reason is the risk of overheating of the economy. The strong employment data shows that the economy is still strong. If interest rates continue to be cut, it may cause the economy to overheat and aggravate inflation.
This reminds me of the situation after the 2008 financial crisis. In order to stimulate the economy, central banks around the world adopted ultra-low interest rate policies. The result? Asset bubbles blossomed everywhere, eventually leading to the inflation crisis in 2022.
It seems that this time the Federal Reserve and Wall Street experts have learned their lessons and do not want to repeat the same mistakes.
The second reason is the risk of inflation. Although inflation has fallen sharply, experts are worried that if interest rates continue to be cut, it may reignite the flame of inflation.
Especially with the job market so strong, upward pressure on wages is likely to build, which would undoubtedly push up inflation.
I can't help but think of the situation at this time last year. At that time, inflation was high and the Federal Reserve had to raise interest rates sharply. Now that inflation has been suppressed with great difficulty, it is natural that the Fed does not want to fail.
The third reason is the surge in 10-year Treasury yields. After the Fed announced a rate cut, the 10-year Treasury yield rose instead of falling, suggesting a negative market reaction to the rate cut decision.
This reminds me of a classic economic theory: the theory of rational expectations, which states that economic entities make decisions based on their expectations for the future.
It seems that market participants do not think that now is a good time to cut interest rates. They use their actions to tell the Fed: you may be wrong.
The fourth reason is that the economy doesn’t need further stimulus. Low interest rates, massive fiscal spending, and the investment boom in artificial intelligence are all adding fuel to the economy.
In this case, continuing to cut interest rates to stimulate the economy is like injecting stimulants into a healthy person. Not only is it unnecessary, but it may also bring side effects.
Seeing this, I can't help but recall the economic situation in the past few years. From the outbreak of the COVID-19 pandemic, to the soaring inflation, to the current economic recovery, we have experienced too many ups and downs in just a few years.
Each time, the Fed plays a crucial role. It is like an acrobat walking on a tightrope that could easily fall if it is not careful.
This time, Wall Street experts believe that the Fed may have taken a wrong step.
Bank of America and JPMorgan Chase have lowered their expectations for another 50 basis point rate cut in November. Yardeni Research even believes that the 50 basis point rate cut in September was unnecessary and there is no need for further rate cuts.
BMO Capital Markets, while still predicting a 25 basis point rate cut in November, also said the Fed could hold off on easing if economic data continues to be strong.
Former Fed Governor Lawrence Lindsey has a more radical view. He believes the Fed may need to "make up for the mistake of cutting interest rates" at the next meeting. Does this mean that he thinks the Fed should raise interest rates again?
Allianz chief economic adviser Mohamed El-Erian reminded the Federal Reserve that it cannot only focus on full employment, but also be wary of inflation and job market risks.
Former U.S. Treasury Secretary Larry Summers believes that the 50 basis point rate cut in September was a mistake and that further rate cuts need to be considered carefully.
Torsten Sløk, chief economist at Apollo Global Asset Management, was even more blunt, stating that there was no need for the Federal Reserve to cut interest rates further.
Seeing this, I can’t help but sigh: Economics is such a complex subject!
Different experts came to different conclusions based on the same data and the same situation. Some believe that interest rates should continue to be lowered, some believe that interest rates should be stopped, and some believe that interest rates should be raised again.
This reminds me of a classic joke: if you lined up all the economists head to tail, they would not be able to reach a consistent conclusion.
But no matter how the experts argue, one thing is clear: the U.S. economy is currently performing far better than expected.
Strong employment data, low unemployment rate and gradually declining inflation all tell us that the U.S. economy remains vibrant.
This is undoubtedly good news for the global economy. After all, the health of the US economy is directly related to the trend of the global economy.
However, for investors, this may mean that the Federal Reserve's monetary policy will become more unpredictable.
If you've been betting that the Federal Reserve will continue to cut interest rates aggressively, it may be time to rethink your investment strategy.
