“The last times the Fed started its cycle of rate cuts with 50 basis points was in January 2001 and September 2007. We know that there was a recession afterwards. That is why this cut caused concern in the market,” stressed the director of economic analysis at Banco Base.
The Fed’s decision “surprised the market,” causing gold to reach historic highs of around $2,600 an ounce and the global strengthening of the dollar, Matías Osorio explained.
Economic impact
The US central bank is not only mandated to keep inflation stable with a target of 2%, but also to ensure maximum employment.
Lowering the interest rate reduces the cost of money, so “access to credit is cheaper, companies can go into debt, they grow more, they hire more people and there is less unemployment,” which translates into economic growth, Osorio explained.
The impact of the cut will not be immediate, but rather in the medium term, as the Fed’s monetary policy was at very restrictive levels. “Given the way the labor market looked, if the Fed did not cut (the rate), this could turn into a mild slowdown and not a moderate one as expected,” said Siller.
Based on the Fed report, maintaining the labor market is currently its main concern. “A 25 basis point reduction is already discounted for November with a 64% probability,” anticipated Felipe Mendoza, market analyst at ATFX.
Greater liquidity in the US economy “could cause an overvaluation impact on financial markets and (a rise) in inflation,” however, “the markets reacted negatively because lowering rates so aggressively is not a good sign either,” Calzada said.
“The Fed has an autonomous mandate and should not be subject to political interference in its decisions, although there is always speculation about the inference of politics on the deficiencies of the Federal Reserve. We believe that they are seeing something that (the others) are not seeing in making this decision,” he added.
