Holiday season: Fed optimism cheers investors
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Christmas has come early for Wall Street, said John Cassidy in The New Yorker. After nearly two years spent fighting inflation with a historic cycle of drastic tightening, the Federal Reserve last week indicated it is "likely to cut a key interest rate three times next year." The nod to a long-anticipated "pivot" — from rate hikes to cuts — spurred a euphoric reaction in the stock market, which sent the Dow Jones industrial average to a record high. The central bank seems to be "playing catch-up" to inflation, which has dropped to about 3%. Holding borrowing rates well above that figure could end up "driving the economy into recession." This wasn’t fully a "declaration of victory over inflation," but it was still music to investors' ears. And rate cuts carry implications that "go well beyond the stock market," reducing the costs of borrowing "on everything from home loans and car loans to business overdrafts."
Jerome Powell could have conducted his press conference "in an oversized red suit with fluffy white trimmings and a matching hat," said Katie Martin in the Financial Times. The Fed chairman "was widely expected to give a subtle wink and nod" to the potential of rate cuts in 2024, as has been his MO. Instead, he "took a victory lap, observing that the recessionistas had got it all wrong." Indeed, the Fed’s pivot makes a recession much less likely, said Greg Ip in The Wall Street Journal. The central bank has two mandates: inflation and unemployment. "For two years, it behaved as if only the first mattered, raising interest rates so steeply that it knew it was courting recession." Inflation fell but a recession never came, and the unemployment rate remained very low. Now the Fed can begin easing financial conditions "to prop up demand in the coming year."
Let’s hope Powell is right, because a premature pivot is risky, said The Economist. "The economy does not much look like it needs a helping hand from the Fed." Far from a recession, the labor market "continues to look too hot," pushing up wages. Consumers are still spending. "Inflation is not at the Fed’s 2% target yet," and loosening too soon risks "significant danger that it will soon stop falling." The dovish turn has put the Fed’s "credibility" on the line, said former Fed Reserve Bank of New York president Bill Dudley in Bloomberg. The danger is that if Powell’s gamble goes wrong, the Fed’s "soft landing" could turn into "no landing at all." The central bank’s sudden dovishness could overheat the economy. "Prices could accelerate again” — and a new burst of inflation would be "stickier" than that caused by the pandemic’s supply chain snarls.
The timing is great for President Biden, said Rick Newman in Yahoo. Voters have blamed Biden for inflation, which has dragged down his approval ratings on the economy. He "needs a break," and so do consumers. They both may get it with a "soft landing" in 2024. Biden, like every president, "wants re-election help from the Federal Reserve." Ironically, it is a Trump appointee — Powell — who has given it to him.
This article was first published in the latest issue of The Week magazine. If you want to read more like it, you can try six risk-free issues of the magazine here.
