On December 18th, the Federal Reserve made yet another significant move by cutting interest rates again, bringing the federal funds rate target range down by 25 basis points to between 4.25% and 4.50%. This marks the third consecutive rate cut since September of this yearWhile such a decision may be interpreted as a measure to alleviate economic strain, it comes against a backdrop of increasing global economic uncertainty and, ultimately, may embed risks that could lead to a future economic crisis.
The statements released by the Federal Reserve are fraught with contradictory languageOn one hand, they assert that the U.Seconomy is “continuing to expand at a steady pace” and that inflation is “gradually decreasing.” Conversely, they admit that inflation remains “somewhat elevated” and that the economic outlook is “still uncertain.” It seems as if the Fed is preparing an alibi for what could potentially be perceived as policy failures
If the economy is indeed “steadily expanding,” why the need for consecutive rate cuts? If inflation has made progress, why is there still uncertainty surrounding it? This seemingly cautious decision hides the Fed’s helplessness and confusion regarding the current economic situation.
First and foremost, the Fed's rate cut strategy evidently responds to the pressures facing the U.Seconomy, both internal and externalWhile labor market tightness has eased somewhat this year, a true return to normalcy has yet to materialize; unemployment rates hover near historical lows, yet issues related to job quality and labor participation rates tend to be sidesteppedFurthermore, America's economic momentum relies heavily on consumer spending and short-term policy stimuli rather than genuine long-term structural reformsThe Federal Reserve's forecast for a 2.1% economic growth in 2024 appears optimistic but is essentially a façade of prosperity behind manipulated data
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Should policy stimuli wane, the likelihood of a rapid economic decline increases dramatically.
Secondly, the Fed's rate cuts have not effectively addressed the inflation dilemma, merely postponing the impending crisisThe inflation rate still exceeds the long-term goal of 2%, with core inflation reaching a substantial 2.8%. This suggests that the imbalance between supply and demand in the U.Seconomy remains criticalExcluding food and energy prices, stubbornly high core inflation reveals the inefficacy of the Fed's monetary policy to control the prices of fundamental consumer goodsMore significantly, a heavy reliance on interest rate cuts risks inflating asset prices further, exacerbating wealth inequality, and potentially creating an even more complex inflation problem in the future.
At a recent press conference, Jerome Powell indicated that the Fed's policy stance has shifted from "restrictive" to "cautious." However, this so-called "caution" lacks a clear policy direction and has led to increased market confusion
Based on the Fed's economic forecasts, the federal funds rate is expected to drop to between 3.75% and 4% by the end of 2025, implying only two possible rate cuts next yearWhile this deceleration might superficially aim to stabilize the market, it also highlights the Fed’s conundrum: cutting rates too quickly may exacerbate inflationary pressures, whereas a slower pace could dismantle market confidence in economic recovery.
Even more alarming is how the Fed’s policy adjustments heavily depend on “data-driven” approaches, which are riddled with substantial gapsImprovements in the labor market, upward adjustments to economic growth, and declining inflation expectations are not indicative of a holistic rebound in the economic fundamentals; rather, they reflect the temporary effects of loose monetary policies, fiscal stimuli, and recovering external demandShould these external factors diminish, the U.S
economy may reveal even more latent issuesMoreover, the Fed's policy decisions show insufficient acknowledgment of the international landscape; particularly in light of escalating geopolitical risks, the instability of global supply chains is poised to push inflation higher once more, potentially nullifying the Fed's rate-cutting efforts.
Additionally, the Fed's interest rate cuts harbor a long-term risk, manifested through their spillover effects on the global economyAs a bellwether for global economic conditions, the Federal Reserve's adjustments resonate beyond American borders, triggering ripple effects in other economiesWithin the dollar-dominated international financial system, the Fed’s rate reduction further depresses real dollar interest rates, leading to capital inflows into emerging marketsAlthough this influx may ostensibly fuel economic growth in those regions, a future tightening of Fed policy could provoke capital outflows, inciting a new wave of financial turmoil that could leave many developing countries reeling.
Ironically, while the Fed aims to relieve short-term economic pressures through rate cuts, it simultaneously magnifies long-term debt risks
A low-interest-rate environment encourages corporations and individuals to increase leverage, and high debt levels remain a core factor that precipitated the 2008 financial crisisPresently, the federal government’s debt has surpassed $33 trillion, reaching unprecedented highs, and the Fed's rate-cutting measures will undoubtedly further amplify fiscal deficitsThis scenario not only jeopardizes the fiscal sustainability of the United States but may also precipitate systemic financial risks in the future.
The United States' "rate-cutting quagmire" is not an isolated phenomenon but rather the result of a long-standing imbalance within its economic frameworkBy applying rate cuts to obscure underlying issues rather than remedying them, the Fed is setting the stage for increasingly complex crisesPowell's emphasis on "caution" seems less like a reasoned strategy and more akin to an act of desperation devoid of clear policy guidance
As the global market tunes in to observe the Fed, what emerges is not a decisive institution commanding the landscape but rather a formless entity lost in a labyrinth of data.
In conclusion, the Federal Reserve's rate cuts have failed to catalyze comprehensive economic recovery and may instead ignite the flames of future crisesThe U.Sgovernment and the Fed repeatedly proclaim that the economy is “robust,” yet this purported “robustness” hinges on a fragile equilibrium of cheap money and fiscal deficitsWhile the Fed's policies seem to soothe economic woes, they are, in fact, accumulating substantial risks for the next crisisWhen the potency of short-term policies diminishes, the realities of the American economy will no longer be hiddenAt that pivotal moment, the globe may have to reckon with the far-reaching repercussions of this “rate-cutting quagmire.”