The Fed just cut interest rates in super-sized fashion — but that doesn’t mean there’s a recession.

To better understand the move, today’s edition features a special column from Eric Wallerstein, a man formerly on the inside who now advises institutions on how to invest their cash.

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What to make of the first cut in 4 years

Eric Wallerstein is the chief market strategist at Yardeni Research and a former trader at the New York Fed. Eric and Wall Street veteran Ed Yardeni write daily QuickTakes connecting economic data to markets and investing decisions for individual investors. Learn more at yardeniquicktakes.com. 

The Fed typically cuts interest rates to stimulate a languishing economy or clean up a financial mess.

From where I am standing, the economy looks pretty good.

Financial markets also seem pretty unbothered: Stocks are at record highs, market volatility is low and credit spreads — which we can think about as the risk of companies defaulting on their debt — are near all-time lows. 

So why did the Fed slash the economy’s benchmark borrowing rate by half a percentage point?

1) Employment mandate

The unemployment rate remains very low. In fact, it’s right at the long-term level Fed officials believe is consistent with “full employment.”

However, unemployment has been rising from record lows and new hiring is cooling.

With fewer job openings for each unemployed worker, Fed Chair Jerome Powell does not want to see the unemployment rate rise much (if any) further.  

2) Mission accomplished?

Fed officials updated their quarterly forecasts today. The message was essentially, “mission accomplished, inflation is solved.”

Yet the bond market begged to differ. Long-term Treasury yields climbed and stocks fell.

The read through? Mission not-so-accomplished.

Inflation is falling toward the Fed’s 2.0% target but there is now greater risk of it remaining persistently higher in the future.

Did an economy with full employment, record net wealth, and 3.7% year-over-year growth in consumer spending really need a turbocharged boost? Small businesses still say inflation is their biggest issue. 

3) Easy goes it

Consumers aren’t happy that prices rose by more than a third over just a few years — and rightfully so.

But the Fed is more concerned about preventing a recession (which we frankly do not see) by maintaining easy monetary policy than fully tackling inflation over the long run.

Perhaps that the central bank waited until consumer prices were rising at an 8% annual rate to raise interest rates. 

Comments, contentions or feedback? Let Eric know directly on X @ericwallerstein.

Elsewhere:

❌One Fed official didn’t want a jumbo rate cut. Michelle Bowman became the first Fed governor since 2005 to vote against an interest-rate decision by the central bank. That prevented Powell from securing a consensus vote in one of the most pivotal decisions in recent monetary policy history. (Yahoo Finance)

📊Stocks dropped Wednesday. An upbeat Jerome Powell didn’t exactly buoy stocks. Equities swung back and forth in afternoon trading before ultimately finishing lower. Meanwhile, yields on the 2-year and 10-year Treasurys both climbed. (Barron’s)

🚀History’s best bets after a Fed cut. Strategists at BMO studied the eight monetary easing cycles since 1982 and found that, 75% of the time, the S&P 500 gained ground in the 12 months after the first cut. Across each of those cycles, a handful of stock sectors showed strong performance including healthcare and consumer staples. (Business Insider)

Rapid-fire:

• The US 30-year mortgage rate dropped to its lowest level in two years (Reuters)

• Bond king Jeff Gundlach said Fed cuts have come too late and the US is already in a downturn (Business Insider)

• Boeing put tens of thousands of employees on furlough after a strike shut down production of some of its planes (BBC)

• Trump Media stock closed at new lows just before the “lockup” expiration date, when Donald Trump is free to sell his shares of the company (CNBC)

• Top macro analysts break down how Fed rate cuts could hurt the market (Monetary Matters)

Last thing:

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