Since the Federal Reserve initiated interest rate cuts in September, its communication regarding the direction of monetary policy has remained ambiguous, repeatedly signaling that it is “not in a hurry to cut rates quickly,” which has led to fluctuations in global markets. However, the Fed’s approach of “driving monetary policy decisions through data” has failed to convince market participants, and the cost of slowing the pace of rate cuts could be significant.
On September 30, Federal Reserve Chairman Jerome Powell stated that there is no preset path for monetary policy and that future actions will continue to be guided by data. He emphasized the need to balance efforts to curb inflation with supporting the labor market. Powell mentioned that the 50 basis points cut in September “does not imply further significant cuts this year,” asserting that the Fed “will not rush to cut rates quickly.”
This statement dampened expectations that the Fed would again implement a major 50 basis point cut, resulting in a strong market reaction. On that day, the yield on the two-year U.S. Treasury surged, the dollar against the yen jumped more than 1% in a short time, and U.S. stocks saw a broad decline, prompting traders to quickly reduce their bets on the overall extent of future rate cuts by the Fed. Analysts indicate that the Fed has limited room to adjust the pace of rate cuts given the substantial revisions in U.S. economic data, increased concerns about a possible recession, and rising interest expenditure pressures.
The Fed has consistently indicated that it will decide on rate cut speeds based on economic data; however, trust in U.S. data is facing challenges. In mid-August, the U.S. Labor Department announced significant downward revisions of 818,000 to the number of new jobs added over the past year ending March 31, effectively cutting previously reported job gains by nearly a third. Such a large adjustment in critical economic data is quite rare both historically in the U.S. and globally. This extensive revision has led the market and economists to question the reliability of the Fed’s data-driven decision-making framework, raising concerns that it “may undermine confidence in official U.S. statistics.” Thus, the data foundation supporting the Fed’s adjustment of the rate cut pace appears to be shaky.
The risk of recession is increasing for an economy that has been enduring high interest rates for a prolonged period. Despite the Fed’s repeated assertions of the “overall strength of the U.S. economy,” many market players and economists suggest that a recession may be imminent. Investment banks like Goldman Sachs have recently advised clients to prepare for significant changes in the economy, indicating that shifts in the macroeconomic landscape have markedly increased the chances of a recession. Notably, renowned investor Warren Buffett’s accelerated selling of stocks has garnered close attention. Over the past two years, he has offloaded several core stocks he had held for years, leading to a remarkable 161% surge in cash reserves, reaching $276.9 billion. Maintaining high interest rates is likely to further amplify risks, complicating policy adjustments.
Additional pressure is mounting from U.S. fiscal matters. A report released by the Congressional Budget Office on October 8 revealed that for the fiscal year 2024, the federal government’s revenues are projected to be $4.918 trillion, while total expenditures will reach $6.752 trillion, resulting in a budget deficit exceeding $1.8 trillion, an increase of $139 billion from the previous fiscal year. Among these figures, net interest payments on public debt amount to $950 billion, a staggering $240 billion increase from the previous year—a 34% rise, accounting for 14% of total annual budget expenditures, surpassing U.S. defense spending. Currently, the federal debt continues to rise, and if the Fed insists on decelerating the pace of rate cuts, interest payments will keep climbing, leading to further deterioration of the fiscal situation.
Analysts suggest that the Fed is likely aware of these circumstances but has been indecisive on the rate cut issue—potentially due to a desire for stability with the approaching elections or to retain flexibility for future policy adjustments. However, “failing to assess the situation can lead to disastrous consequences.” Given the current state of the U.S. economy, hesitating and missing the opportunity for timely policy adjustments could only invite further complications.
