Why the Federal Reserve will deliver on rate cuts

US Federal Reserve chair Jerome Powell holds a news conference after its meeting on Wednesday. Picture: AFP

The Fed might have thrown a one-day spanner into Wall St’s relentless, all-consuming greed machine – the Dow went down 300 points overnight Wednesday, sending our market down nearly 100 points on Thursday.

Fed head Jerome Powell did not give Wall St what it lusted for: Powell coming back to the Fed’s first meeting for the year, promising to slash interest rates and to keep slashing.

But I doubt the negativity will last long; indeed, I’d be seriously surprised if it even lasted out the week. For two reasons.

First, Wall St is in full-on greed mode. It will just plain refuse to be disappointed for long.

But secondly, more rationally, the Fed will be cutting this year, and it will be starting soon, because inflation in the US is heading below 3 per cent and towards the Fed’s 2 per cent target.

Indeed, the Fed did say as much in its “disappointing” statement.

At its previous meeting in December, the Fed was still thinking and talking possible future rate hikes.

It specifically referred to the “extent of any additional policy firming” that might prove appropriate.

That has vanished from this latest Fed statement. Now its mindset has switched 180 degrees to thinking about rate cuts, even if it refers to their potential cautiously.

Thus, yes, its statement said it did not expect it would be appropriate to cut rates until it was more confident of inflation coming to target.

But, to borrow a well-worn phrase: it’s the mindset, stupid. OK, for Wall St: stupid and greedy.

The Fed’s completely buried any thought it might have had of hikes.

It’s collective, combined, unanimous – the Fed tells us how members vote, and they are and have been voting unanimously with the chairman – thinking is now all and only about the first cut, and then how many and how quickly it cuts after that.

This provides a fascinating forward to our own Reserve Bank’s own first meeting back for the year next Tuesday. Both in policy terms and even more in presentation.

The Fed’s been having these post-decision media conferences for decades; next Tuesday’s will of course be the first from our RBA and our Governor Michele Bullock.

Apart that is, from the odd one-off crisis ones we’ve seen, like with the GFC and Covid.

And it’s coming at precisely the same policy pivot point for us down under, as we’ve just seen with the Fed.

Just like the Fed, in December, our RBA was still talking – and so thinking – possible future rate hikes.

After of course that unfortunate Cup Day hike in November.

And I quote from the RBA in December: “Whether further tightening of monetary policy is required”.

Now, yes, I can fully understand that Bullock might be reluctant to do her 180, Powell-style, from meeting to meeting.

But she’s now seen how he did it.

And, for the first time in the 70-year history of the RBA, she – intriguingly, ironically, just plain interestingly, as the first female governor – is going to have to do or not do it in public and subject to questioning; not just via a statement.

Interesting times.