In a surprising move last week, the Federal Reserve cut interest rates by 50 basis points, citing unconvincing and vague concerns about labor market cracks as the primary rationale. As I discussed in my recent MNI Podcast episode, FedSpeak: 50bp Not New Easing Baseline, I believe this decision was premature and risks undermining the Fed’s credibility at a critical juncture for the U.S. economy. While the Fed has a challenging dual mandate of price stability and maximum employment, this aggressive cut raises questions about whether the central bank is overreacting to short-term data or succumbing to external pressures.
The Fed’s Rationale: Labor Market Cracks or Something Else?
The Fed’s official statement pointed to “signs of softening” in the labor market as the primary justification for the 50 basis point cut. However, the data does not convincingly support such a dramatic move. While job growth has slowed modestly from its post-pandemic peak, the unemployment rate remains near historic lows at 3.8%, and wage growth continues to exceed pre-pandemic trends.
If the labor market is indeed showing cracks, they are hairline fractures at best—not the kind of structural damage that warrants a 50 basis point cut. This raises the question: What is the Fed really responding to?
Theory 1: Playing Catch-Up with the Bond Market
One plausible explanation is that the Fed is trying to catch up with the bond market, which has been pricing in rate cuts for months. Yields on 10-year Treasuries have fallen significantly since the start of the year, reflecting investor expectations of a slowing economy and potential Fed easing.
However, the Fed’s role is not to follow the bond market—it’s to lead it. Instead of cutting rates to align with market expectations, the Fed could have used its powerful Fed-speak communication tools to “jawbone” the market in the right direction. By clearly signaling its commitment to data-dependent policy and emphasizing the economy’s resilience, the Fed might have prevented the bond market from getting ahead of itself.
Instead, the 50 basis point cut signals that the Fed is more concerned about market sentiment than economic fundamentals. This risks creating a feedback loop in which markets push for even more aggressive easing, further complicating the Fed’s task of maintaining stability.
Theory 2: Throwing a Bone to Dovish FOMC Members
Another possibility is that Chair Powell is attempting to placate the more dovish members of the Federal Open Market Committee (FOMC). Over the past few months, a few policymakers have preferred an earlier rate cut, arguing that overtightening outweighs the risks of staying the course.
The 50 basis point cut could be seen as an attempt to “throw them a bone”—a compromise to maintain unity within the Committee. While consensus-building is important, it should not come at the expense of sound policy. By prioritizing internal harmony over economic reality, the Fed risks undermining its credibility and creating uncertainty about its policy framework.
The Risks of Premature Easing
The Fed’s decision to cut rates by 50 basis points is not without risks. While inflation is down from its 2022 peak, it remains above the Fed’s 2% target, with core PCE running at 2.6% year over year. The strong labor market and resilient consumer spending suggest that inflationary pressures could re-emerge if the Fed eases too aggressively.
Moreover, the Fed’s reluctance to admit mistakes—a recurring theme in recent years—raises concerns about its ability to course-correct if this cut proves premature. If inflation begins to reaccelerate, the Fed may find itself in the uncomfortable position of having to reverse course and tighten policy again, creating unnecessary volatility in financial markets and the broader economy.
What’s Next? A Pause After Another Cut or Two
Given the Fed’s recent actions and its historical reluctance to admit missteps, I suspect we will see at least one more 25 basis point cut at the next meeting. However, I also believe the Fed will pause after that, as the economic data does not justify a full easing cycle.
The key will be to closely monitor the labor market, economic growth, and inflation trends. If the labor market remains strong and inflation stabilizes near or above target, the Fed should resist the temptation to cut further. Instead, it should focus on maintaining stability and rebuilding its credibility as a data-driven institution.
Conclusion: A Misstep with Consequences
The Fed’s 50 basis point cut in September 2024 feels like a misstep—a decision driven more by external pressures and internal politics than by economic fundamentals. While the central bank faces a difficult balancing act, it must remain steadfast in its commitment to data-dependent policy and avoid overreacting to short-term fluctuation.
As my recent podcast interview emphasized, the Fed’s credibility is its most valuable asset. By rushing this cut, the central bank risks eroding that credibility and creating unnecessary uncertainty in an already complex economic environment.
The coming months will be critical in determining whether this decision was a temporary stumble or the start of a more significant policy error.