The Federal Reserve’s decision on Wednesday to begin lowering interest rates raises the question of howWall Street has become convinced that current policy rates are. Even after the half-point cut this week, the current stance of policy is considered too tight.suggest that the neutral rate—which would be neither stimulative or restrictive—would be between 3.5 percent to 4.8 percent given the current state of inflation and unemployment.
“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks,” the chairman said in a speech inMany on Wall Street are convinced that the Fed has started the journey late. This was at the heart of the argument for a 50 basis point cut. If the Fed’s current rate is far too restrictive and the Fed is already late to cutting, then moving rapidly toward neutral may be prudent.
“Typically, we believe Fed policymakers when they say that political considerations do not impact their policy decisions at all. But if there is a regime change in November, the optics of immediately downshifting to 25bp cuts – two days after the elections – would be problematic, in our view,” Bhave explains.
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