At first glance, it seems that the Federal Reserve (Fed) hit the panic button by lowering the federal funds rate by 50 basis points earlier this week.
Perhaps the Fed has information we are not aware of. Or, why act this way when just a few months ago, it wasn't considering short-term rate cuts, favoring a “higher for longer” strategy?
This is why it’s essential to take a step back and analyze the beginning of the last ten rate-cut cycles. What we observe is that the significance of an initial rate cut heavily depends on the reason behind it.
According to Ryan Detrick of Carson Group, these rate cuts have occurred in three contexts: the normalization of monetary policy, a response to an economic shock, or during a recession.
You might have guessed that market participants interpreted the recent cut as a normalization of monetary policy, as inflation risks seem to be under control.
Of course, one may or may not agree with this interpretation, but my goal is simply to reflect the prevailing optimism.
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