Powell emphasized more than once that the economy is strong, but I don’t think he truly believes things are going as well as he says. I was listening to Bloomberg, and Mohamed El-Erian raised a valid point: If the economy is that strong, why lower rates by 50 basis points? I agree with him.
Powell knew that market participants would interpret a 50 basis point cut as a signal of recession fears and concerns about a cooling labor market. You don’t want to trigger this kind of thinking because it can create negative cycles. If participants start thinking a recession is coming, they might shift toward safer assets, which could exacerbate a recession.
So, if Powell knew the markets would respond this way, and he wanted to avoid fueling those fears, why did they cut rates by 50 basis points? The reason might be that the risks of not cutting enough—like the risk of over-tightening and triggering a recession—outweigh the risks of causing fear. This suggests the Fed indirectly acknowledges those recession concerns and is acting to protect against them.
The market’s initial reaction to the news was to buy stocks and gold and sell dollars. I think the market didn’t fully grasp the situation at first. As the day went on, they gradually realized the implications. By the end, stocks and gold closed lower.
I believe the labor market is cooling. If it starts to decline more quickly, it will be hard to stop, and the Fed knows this. That’s why I think the Fed will shift its focus to the labor market moving forward.
Additional Topic: One question to Powell was about the housing market. The questioner pointed out that despite the high interest rate environment, housing prices haven’t fallen, and there’s fear that lowering rates again could cause prices to rise. Powell responded by saying that they are trying to balance the economy, but this didn’t really address the question. I don’t think Powell has a clear answer to this issue, and I’m not sure the Fed has the tools to solve housing market problems.
The main issue with the housing market is that it’s hard to target with monetary policy. Let’s consider interest rates: A low-rate environment benefits housing because middle- and lower-income buyers typically purchase homes with loans or mortgages. When rates rise, borrowing costs increase, making homes unaffordable for these buyers. You’d expect prices to fall, but when demand drops, developers also stop building, reducing supply. This dynamic keeps prices stable and makes it difficult to manage housing prices through monetary policy. I think housing is a significant issue worldwide. The time has come to develop solutions, but unfortunately, I don’t expect governments or influential people to provide adequate support for this issue anytime soon.