There’s still plenty to worry about after the Fed cut
The Fed eral Reserve has started cutting interest rates at long last, and it’s a relief that financial conditions in the United States will be easing. But it’s far too early to celebrate.
By beginning its rate cuts with a bang, reducing the federal funds rate by twice the quarter-point minimum with which it might have started, the Fed indicated that it was reasonably optimistic that inflation would remain subdued. Public enthusiasm for artificial intelligence has been buoying share prices. But as I pointed out last week, it remains to be seen whether the billions pouring into AI will pay off in profits for big companies — or for workers whose jobs may be imperiled. AI’s ultimate profitability is critical to many stocks. Foremost among these is Nvidia, which makes the advanced chips that power AI chatbots.
On their own, the bond and mortgage markets have already begun to give consumers some relief, easing financial conditions in important parts of the economy. Average 30-year mortgage rates for example, dropped from 7.8% in October 2023 to 6.1% Thursday, according to the Fred database of the St. Louis Federal Reserve.
But there’s skepticism in the markets about the pace of the Fed’s plans, linked to concerns that the economy may slow markedly. In a memo Wednesday, BofA Research, a unit of Bank of America, said the Fed would probably “get pushed into deeper cuts” this year and next. Considerable volatility in financial markets can be expected, the bank said.The stock market is often erratic but it has been choppier than usual since mid-July, with big weekly declines and increases following one another.
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