The Fed Looks Like It Made a Mistake With Its Jumbo Rate Cut
The U.S. economy is already on the other side of the Federal Reserve’s historic rate-hiking cycle, yet the economy is still running hot.
A slate of recent economic data has revived chatter on whether the central bank’s jumbo rate cut in September was necessary:
Retail sales rose 0.4 percent in September compared with August.
Consumer spending was revised higher.
Weekly applications for unemployment benefits unexpectedly fell, despite hurricanes and worker strikes.
“Today’s data further confirm our assessment that the Fed was too dovish when it cut the federal funds rate by 50bps on September 18,” strategists at Yardeni Research wrote in a note to clients Thursday.
In response to the Fed’s first rate cut, the Yardeni team responded by raising their forecast for stocks and predicting a jump in bond yields — which is exactly what’s happened since the Fed’s rate cut.
Stocks continue to break records, and the 10-year U.S. Treasury yield is up roughly half a percentage point to 4.10 percent.
And with Wall Street pricing in even cheaper borrowing costs ahead, few analysts expect stocks to lose steam.
CME data shows traders see about 90 percent odds for a 25-basis-point rate cut on November 7 and roughly a three-in-four shot of the same move lower in December.
Another detail that makes you wonder whether the Fed panicked with its jumbo move: The Atlanta Fed’s GDPNow tracking model revised its third-quarter annualized GDP from 3.2 percent to 3.4 percent on Thursday.
Earlier this month, I raised this same question to Gene Goldman, chief investment officer for Cetera Investment Management. He’s in the camp that the Fed did not have to act so boldly in September:
“The move by the Fed to aggressively cut rates has added a new risk that I believe becomes the biggest risk to this Goldilocks economy: The Fed cut rates too much, too fast,” Goldman said.
To be fair, strong economic data has not coincided with optimism among everyday Americans.
The latest consumer sentiment survey from the University of Michigan saw an unexpected dip for the first time in three months with the presidential election weeks away. Respondents expressed frustration around high prices and inflation — running counter to the retail sales data for the same month.
“Consumers may be feeling less confident on the economic outlook … but for now are happy to continue spending,” said ING economist James Knightley. “Financial pressures are building for many households, but strength in consumption from those at the top of the income spectrum is more than offsetting that story. This suggests the Fed will tread carefully with 25bp cuts.”