Why US Federal Reserve is too late with rate cuts

If the Fed had been doing its job it would have already cut rates but it’s now unlikely the US will get its ‘Goldilocks scenario’ and by October the economy won’t look great.

US Federal Reserve Chairman Jerome Powell. (Photo by ROBERTO SCHMIDT / AFP)

A month ago the ‘smartest guys in the Wall St room’ feared that the Fed would have to cut interest rates – and they sent the Dow plunging more than 1000 points.

Last Friday, Fed head Jerome Powell actually promised the Fed would now cut interest rates – and these same ‘smartest guys’ promptly sent the Dow up more than 400 points.

So, one day rate cuts are to be feared; yet less than a month later they are celebrated? Just Wall St ‘doing its thing’?

That in itself, should make you be just a tad cautious about the current market enthusiasm, which Monday took our market back close to its all-time high above 8000.

A month ago the popular ‘analytical’ meme was that the Fed was ‘behind the curve’.

That the US economy was actually in a tailspin; the Fed had been caught napping; and indeed there were even calls – self-interested, anyone? – for an emergency 50 point rate cut.

Now, it’s all wall-to-wall Goldilocks: the US will emerge – with apologies to Winston – into broad Fed-sunlit uplands.

Inflation will melt away. The economy will chug along very nicely indeed. Corporate profits will shine. And indeed, AI will pour untold billions of ‘free money’ into corporate and investor pockets.

Reality check.

The Fed is only going to embark on rate cuts in September because inflation in the US has fallen sharply and, seemingly, sustainably.

Anyway you cut that, if inflation does go back to 2 per cent, and stays there – the requirement for sustained Fed rate cuts - it will be with a US economy that is in recession , close to recession, or barely recording some growth.

I suggest the Fed is actually ‘behind the curve’.

That it is late to the party. That if it had really been doing its job, it would have been cutting into the already clearly fallen – that’s fallen, past tense, not falling – inflation. And a slowing US economy.

Traders work on the floor of the New York Stock Exchange. (Photo by ANGELA WEISS / AFP)

This is important for one very big reason. The US is unlikely to get the ‘Goldilocks scenario’.

That come October and even more into the new year, the US economy won’t look so great. And indeed, and more particularly, US corporate profits – and so share values – won’t look so great.

The wildcard is of course AI. But as usual, those ‘smartest guys’ can’t see much beyond their greed.

Best case for AI is that it does wonders for corporate profits, and doesn’t hurt jobs and so the ordinary American and his and her spending – too much.

But there us a very real risk that AI could prove the ultimate exercise in – at least, short-term – prosperity-destroying profitable productivity.

Yes, we get some spectacular winners. But at massive cost across the US economy. And a Dow that’s a lot, lot lower than 40,000; even with much lower interest rates than now.

This is not a prediction; just a word of warning about the current Wall St joy.

That’s because Wall St drives our market.

But we also ‘have China’. It’s China that drives our economy. And that’s a whole different story. Somebody, tell Jim. Please.