In September, following the Federal Reserve’s decision to cut interest rates, the communication surrounding its monetary policy direction has remained perplexing, signaling multiple times that there is “no rush” to implement further cuts. This has led to fluctuations in the global markets. However, the Fed’s approach of “data-driven monetary policy” has not convinced market participants, and the costs associated with slowing the pace of rate cuts appear significant.
On September 30, Fed Chair Jerome Powell reiterated that there is no preset path for monetary policy, emphasizing the importance of data in guiding future actions. He sought to strike a balance between controlling inflation and supporting the labor market. Powell indicated that the recent 50 basis point cut does not imply more large cuts will follow this year, stating, “We’re not in a hurry to lower rates quickly.”
This statement effectively dampened expectations for another substantial cut from the Fed, triggering a notable market reaction. On that day, the yield on two-year U.S. Treasury notes surged, while the dollar rallied more than 1% against the yen within a short time. U.S. stock markets initially declined across the board, and traders rapidly adjusted their expectations regarding the overall scope of future Fed rate cuts. Analysts have pointed out that due to significant revisions to economic data, deepening fears of recession, and escalating interest payment pressures, the Fed has limited room to gradually adjust its rate cut strategy.
The Fed has repeatedly stated that the pace of cuts will depend on economic data. Yet, the credibility of U.S. data is currently facing challenges. In mid-August, the U.S. Labor Department announced a downward revision of job growth, cutting the one-year total by 818,000 jobs as of March 31. This shocking revision constituted nearly a one-third reduction in the previously reported figures, making it a rare adjustment in both U.S. history and globally. Such significant data revisions have led market participants and economists to question the reliability of the Fed’s data-driven decision-making process, potentially undermining confidence in official U.S. statistics. Thus, the data foundation that the Fed relies on for adjusting rates appears shaky.
With the U.S. economy remaining under high interest rates, the risk of recession continues to rise. Despite the Fed’s assertions that “the overall U.S. economy is strong,” many in the market and economic communities feel that a recession is not far off. Investment banks like Goldman Sachs have begun advising clients to prepare for significant economic shifts, stating that “some changes in the macroeconomic landscape indicate that the probability of a recession has notably increased.” The actions of renowned investor Warren Buffett, who has been reducing his stock holdings, have also garnered considerable attention. Over the past two years, Buffett has sold off several long-held core stocks, causing his company’s cash reserves to swell by 161% to $276.9 billion. Continued high interest rates will only amplify existing risks and complicate policy adjustments further.
An even greater pressure source comes from U.S. fiscal challenges. A report from the Congressional Budget Office on October 8 revealed that in fiscal year 2024, federal government revenues are projected at $4.918 trillion while total expenditures will reach $6.752 trillion, leading to a budget deficit exceeding $1.8 trillion, an increase of $139 billion from the previous fiscal year. Of particular concern is the net interest expenditure on public debt, anticipated to total $950 billion—up by $240 billion, or 34% from the prior year, and constituting 14% of total annual budget spending, surpassing U.S. defense expenditures. The total federal debt continues to rise, and if the Fed maintains a slow pace in rate cuts, interest payments will likely soar, exacerbating the fiscal condition.
Some analysts suggest that the Fed is likely aware of these circumstances but has been inconsistent in its approach to rate cuts recently. This may stem from a desire for stability as elections approach or a need to leave room for future policy adjustments. However, “inaction or indecisiveness can lead to mistakes,” and given the current state of the U.S. economy, hesitation to adjust policy at the right time could lead to greater difficulties ahead.
