The US Federal Reserve (Fed) is in the spotlight as it prepares to begin a new phase of rate cuts. This first reduction, scheduled for September 18, seems inevitable, but it is the magnitude of this reduction that intrigues investors and gives rise to speculation on the stock market. Is this a sign of a panicked Fed, or a more measured strategy in the face of current economic uncertainties? Decryption.
The Fed faces a delicate turning point
Since the Jackson Hole meeting in August, the Fed has clearly been laying the groundwork for what looks like a major shift in its monetary policy.
After raising rates by 500 basis points between March 2022 and July 2023 to contain galloping inflation, the time now seems ripe for easing. But it's not the decision itself that worries the stock market, it's what it could mean.
Indeed, the rate cut could respond to two very different scenarios. On the one hand, the Fed could simply seek to accompany a natural economic slowdown.
On the other hand, it could act out of fear of an imminent recession. This vagueness worries the markets, accustomed to a cautious Fed, but which, this time, could well be pushed to take more radical decisions.
A 50 basis point cut in September, for example, would be seen as a desperate move, or even a “panic mode” move. A move that has historically only been used in response to major crises, such as the Covid-19 pandemic.
Markets on a knife edge
This climate of uncertainty is palpable on the stock market. According to analystsa rapid drop in rates could have immediate consequences for risky assets, particularly stocks, which constitute a central pillar of American household wealth.
If a 50 basis point cut is considered, it could lead to increased volatility in stock markets as investors see it as a sign of a struggling US economy.
Uncertainty also hangs over the jobs market, which has become the new focus of attention after a long period in which inflation dominated economic debates.
The figures are vague and difficult to interpret, particularly because of the diversity of sources and the influence of immigration on the labour market.
Some observers believe that the increase in labor supply could slow the rate cuts because it makes aggressive Fed action less urgent.
However, there are critics who say the Fed has already acted too late. They say the central bank is playing a losing game, and a 50-point rate cut in September would be just playing catch-up, rather than a real long-term strategy.
A risky bet for the Fed
Despite these uncertainties, there is little doubt that the September meeting will mark an important turning point for the Fed. Cutting rates too far would risk undermining its credibility and would be seen as an admission of failure in its management of inflation and the economic slowdown.
On the other hand, a more moderate reduction could be interpreted as a cautious measure, aimed at calming tensions without causing panic.
It is also important to note the political aspect of this decision. With presidential elections approaching, any overly abrupt move could be poorly received, both by the stock market and by policymakers.
This is why some experts are recommending a more measured reduction, spread over several months, which would allow the Fed to maintain a certain flexibility while reassuring the markets about its ability to navigate an uncertain period.
In conclusion, the Fed is at a crossroads between caution and action. The upcoming meeting on September 18 promises to provide key indications on the health of the U.S. economy and the Fed's ability to adapt to an increasingly uncertain economic environment.
Investors, meanwhile, remain hanging on every word and gesture, trying to decipher the signals from a central bank under pressure. Meanwhile, bitcoin reigns supreme.
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