Investing.com — The Fed’s decision to begin its rate cutting cycle with a jumbo cut in September despite believing the economy is in good shape has all the makings of another policy error as ongoing strong demand may revive inflationary pressures.
“The risk is that the Fed will have to backtrack on rate cuts later this year or in 2025, similar to the policy error made in 2021,” MRB Partners said in a Thursday note amid worries that the Fed is underestimating the strength of the economy and inflation.
The Fed delivered a 50 basis point rate cut on Sept. 18, marking the start of its easing cycle and the first cut since March 2020. The Fed also signaled that it could deliver two further 25bps cuts this year and a percentage point cut next year.
The jumbo cut was “highly unusual,” MRB Partners says, when compared with past rate cutting cycles, when the NBER’s business cycle indicators were showing much weaker trends.
Fed Chair Jerome Powell acknowledgement that “the U.S. economy is in good shape … and the labor market is at a “strong place,” was also at odds with the decision to deliver a larger cut, the research firm added.
The Fed’s aggressive move is premature, given the resilience of the U.S. economy.
Consumer spending remains robust, supported by a strong labor market and rising real incomes, the research firm said.
The are several factors that could fuel persistent inflation including tight labor markets driving wage growth, ongoing supply chain challenges, geopolitical tensions impacting commodity prices, and the lingering effects of fiscal stimulus measures, the firm added.
The backdrop of sticky inflation, led by strong demand could potentially complicate the Fed’s efforts to manage price stability while supporting economic growth.
