Why the Fed Might Cut Rates Despite a Strong Economy
Despite an economy that appears to be thriving, the Federal Reserve's potential rate cut this December remains a perplexing issue for many.
According to the Atlanta Fed’s GDPNow, Q4 real GDP growth is projected to be 3.3%, showing signs of acceleration. Meanwhile, inflation seems to be recovering, and financial conditions are nearly as loose as during the market frenzy of 2021. Yet, the Federal Open Market Committee (FOMC) continues to hold a 70% probability of cutting rates, leaving many questioning the rationale behind such a move.
One reason for the anticipated cut is the Fed’s previous guidance signaling a December rate reduction. The committee is reluctant to reverse this guidance, fearing it could unsettle the markets. However, the more intriguing explanation lies in the Fed’s approach to determining the neutral interest rate, known as r*. Since r* cannot be directly measured, the Fed relies on two models: the dynamic Lubik model and the more traditional Williams model.
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The latter, heavily weighted within the Fed due to its creator being the current NY Fed president, continues to indicate that monetary policy remains restrictive. However, the Lubik model suggests that the economy may already be at neutral, raising questions about the Fed’s current stance.
Market indicators suggest that financial conditions are far from restrictive, calling into question the accuracy of the Williams model. As the FOMC discusses where neutral truly lies, some members are even considering a more flexible approach. Given the ongoing market rallies and economic signals, it is difficult to argue that current policy is restrictive. Nevertheless, a rate cut in December remains the likely scenario as the Fed continues to operate within its established framework.
Alexander Stefanov
Reporter at CoinsPress
Alex is an experienced finance journalist and a cryptocurrency and blockchain enthusiast. With over five years of experience covering the industry, he deeply understands the complex and constantly evolving world of digital assets. His insightful and thought-provoking articles provide readers with a clear picture of the latest developments and trends in the market. His passionate approach allows him to break down complex ideas into accessible and insightful content. Follow up on his content to be up to date with the most important trends and topics - stay ahead of the curve with CoinsPress.
