The US Federal Reserve (Fed) is in the spotlight as it prepares for a new phase of rate cuts. The expected decision at the September 18 meeting raises speculation and concern in the stock market. Which scenario will unfold, and what could it mean for the economy?
The Fed at a Crossroads
Since the Jackson Hole meeting in August, the Fed has clearly signaled the possibility of a significant shift in its monetary policy. After raising rates by 500 basis points from March 2022 to July 2023 to contain inflation, the time now seems to be for easing. But what exactly might this decision imply? The rate cut could respond to two different scenarios. On one hand, the Fed may be looking to accompany a natural economic slowdown. On the other hand, it could be acting out of fear of an imminent recession. This ambiguity worries the markets.
Market Uncertainty
This uncertainty is also palpable on the stock market. If a 50 basis point cut is considered, it could lead to increased volatility in the stock markets, as investors would see it as a sign of a deeply troubled US economy. Uncertainty also hangs over the job market, which has become the new focus of attention after a long period where inflation dominated economic debates. Some observers believe that an increase in the labor supply could slow the rate cuts, making aggressive Fed action less urgent. Critical voices claim that the Fed has already acted too late.
Risks for the Fed
Despite these uncertainties, there is no doubt that the September meeting will mark an important turning point for the Fed. A significant rate cut risks compromising the credibility of the central bank and would be perceived as an admission of failure in managing inflation and the economic slowdown. Conversely, a more moderate reduction could be interpreted as a prudent measure, aiming to calm tensions without causing panic. The political aspect is also important. With presidential elections approaching, any drastic maneuver could be poorly received by both the stock market and policymakers. Experts recommend a more measured cut, spread over several months, to maintain flexibility and reassure markets.
The Fed stands at a crossroads between caution and action. The upcoming meeting on September 18 promises to provide key indications about the state of the US economy and the Fed's ability to adapt to an increasingly uncertain economic context. Investors are hanging on to every word and gesture, trying to decipher the signals from a central bank under pressure.
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