Playing Politics?
On Wednesday’s broadcast of CNN International’s “First Move,” CNN Business Editor-at-Large, International Business Correspondent, and host Richard Quest acknowledged that former President Donald Trump has a valid point. He asserted that the Federal Reserve is either playing politics or has reduced interest rates by half a point because the economy is worse than anticipated. Quest explained that the Fed’s decision was necessary to stimulate the economy, which is currently facing challenges.
Host Julia Chatterley played a video clip of Trump expressing his concern about the economy’s condition. Trump stated, “[Relevant portion begins around 21:00] I guess it shows the economy is very bad to cut it by that much. Assuming they’re not just playing politics, the economy would be in dire straits, or they’re playing politics, one or the other. But it was a significant cut.”
Quest responded, “Donald Trump is somewhat correct in his assessment. There’s no other way to look at it: either the Fed is playing politics or it has reduced interest rates by half a point because the economy is worse than expected. Things are indeed worse, and the Fed needs to take action to stimulate the economy. And that, I believe, is an unavoidable situation. Jay Powell is in a difficult position, as he acknowledges that they’ve waited a long time, but they’ve decided to cut rates by half a point because they believe they can manage it effectively. It’s not a crisis, not a panic, but rather an aggressive move to prevent the unemployment rate from rising further.”
Chatterley then expressed her concern about the economy, stating that while growth is still at 2%, inflation is contained. However, she noted that the Fed will likely take drastic measures to prevent the unemployment rate from rising significantly. She described the situation as a potential soft landing if the Fed can successfully execute its strategy.
Quest responded, “If they can do it, it’s because they’re focusing on the snowball rolling down the hill. Either the snowball is speeding down the hill and needs to be slowed down, or the cake is baking in the oven and needs to be taken out. Regardless of which one you prefer, that’s what this half-a-percentage point is designed to achieve, plus two more. Jay Powell admitted today that if they had the employment numbers earlier, they could have taken action in July, should have taken action in July, would have taken action in July. Ultimately, I don’t believe it’s a crisis; it’s just a case of making haste.”
Quest further clarified that the cut won’t have any significant impact on the economy before the election. More Here
Navigating Market Corrections: The Federal Reserve's Role in Economic Turns
In the intricate dance of global finance, few entities wield as much influence as the United States Federal Reserve. Known colloquially as "the Fed," this central banking system plays a pivotal role in managing monetary policy, which includes the setting of interest rates. These decisions can have profound effects on everything from the cost of borrowing to the health of financial markets. Here, we delve into historical moments where the Federal Reserve's decision to lower interest rates was followed by market corrections, offering insights into how these economic levers can shape our financial landscape.
The Dot-Com Bubble and Aftermath
The turn of the millennium saw an unprecedented boom in technology stocks, fueled by optimism about the internet's transformative potential. However, when the dot-com bubble burst in 2000, the Fed responded by reducing the federal funds rate from 6.5% to 1.75% by late 2001. This move was aimed at cushioning the economic fallout, but the market correction continued into 2002, reflecting the tech sector's overvaluation and investors' retreat from high-risk assets.
The Financial Crisis of 2007-2008
Perhaps one of the most dramatic periods in recent economic history, the 2007-2008 financial crisis saw the Fed cut rates dramatically in response to the subprime mortgage debacle. By December 2008, rates were near zero, but this was too late to prevent severe market corrections. The S&P 500 plummeted, marking one of the worst bear markets in history. Here, the rate cuts were more reactive, aimed at mitigating the crisis's depth rather than preventing the correction.
The Years Following the Crisis
After the financial crisis, with rates at historic lows, the Fed maintained this stance to encourage economic recovery. This period of ultra-low rates might have sown the seeds for future asset bubbles, leading to market jitters and minor corrections like the 2010 flash crash, though directly triggered by other factors.
The 2015-2016 Market Volatility
As the Fed began to normalize rates after years of near-zero policy, markets entered a phase of uncertainty. Corrections in late 2015 and early 2016 were driven by concerns over China's economy, falling oil prices, and anticipation of tighter U.S. monetary policy. While not directly tied to a rate cut, this period showed how market corrections could follow expectations around monetary policy shifts.
The Pre-COVID-19 Era and Beyond
In 2019, facing global economic slowdowns, the Fed cut rates to bolster economic activity. This wasn't immediately followed by a correction but set the stage for the volatile conditions that escalated with the onset of the global health crisis in 2020. The rapid rate cut to near zero in March 2020 was swiftly followed by one of the quickest and most severe market corrections, with the S&P 500 dropping over 30% in weeks.
