Last week, the Fed made a 0.5% cut to its rate. Its decision meant that one of the most highly anticipated monetary policy decisions was finally made. In fact, it came many months later than the market had thought; at the end of last year, investors believed a cut would arrive as soon as March 2024. But with economic data consistently remaining stronger than predicted, the Fed felt that keeping rates higher for longer was the only way forward. For instance, inflation remained stubbornly elevated while labor markets were resilient too.

However, labor market figures started to show a slowing in the economy and so, last Wednesday, the Fed announced its cut. The intention will be to prevent sluggish economic growth, or even a full on recession. But, the size of the cut was larger and a more drastic measure than typically seen – the Fed generally only cuts rates by 0.25% at a time.

So, bearing that in mind, is the economy in a worse state than policymakers would hope? And, therefore, has the Fed acted quickly enough, and strongly enough, to help guide the economy to a soft landing?

Here we find out.

What is a soft landing?

Before delving into the likely impact of the Fed’s actions, it’s first good to understand what a soft landing actually is. In economic terms, it is when a central bank can slow down inflation without causing a recession. It’s tough to do because it demands a delicate balancing act of reining in price rises without a sharp contraction in economic growth.

In the case of the last couple of years, the Fed had a difficult challenge as inflationary pressures were incredibly strong due to geopolitical tensions, a large rise in energy costs, and dealing with the fall out of Covid which had disrupted supply chains globally. Arguably, making rates much higher, immediately, could have stopped inflation increasing so swiftly. But if the Fed had increased rates too much, too quickly, they could have triggered a recession through establishing economic conditions that were too hard for businesses to survive in.

So, will the Fed achieve a soft landing?

As with any economic scenario, it depends. So far, the Fed has managed to pull off bringing down inflation while the economy has kept growing.

However, Atlanta Federal Reserve President, Raphael Bostic, said in the last week that ‘progress on inflation and the cooling of the labor market have emerged much more quickly than I imagined at the beginning of the summer.” Market commentators could, justifiably, be worried then that the Fed left rates too high for too long and the cooling of the labor market is an indication of difficult times to come. While Bostic went on to say ‘in this moment, I envision normalizing monetary policy sooner than I thought would be appropriate even a few months ago’, the large rate cut could be too little too late.

To a certain extent, and exceedingly frustratingly, only time will tell if the rate cut and further monetary policy easing will do the job. For policy makers, the key focus will be on personal consumption expenditure (PCE) prices in addition to personal income and spending reports as well as employment data. Much will depend on how inflation evolves and if the labor market holds up – but there are always other factors which may disrupt even the best made plans. Geopolitical tensions and unrest could further affect supply chains, for example, acting again as a strong inflationary pressure.

For investors then, watching data closely and listening in on key announcements and speeches from the Fed is key. While last Wednesday’s rate cut signals a pivotal moment for the markets as a whole, especially as markets tend to react positively to looser monetary policy announcements, investors shouldn’t assume that the only way is up. Even though the Fed’s actions may be a strong indication that more cuts are to come, staying vigilant to the risks that remain is vital.

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