Mandel Ngan | AFP | Getty Images
U.S. Federal Reserve “Fed’s” Chair Jerome Powell holds a press conference in Washington, D.C., on Sept. 18, 2024.
The Federal Reserve’s move to lower interest rates by 50 basis points puts the U.S. economy on track for a soft landing, according to Goldman Sachs‘ chief financial officer.
His comments come as market participants question whether the U.S. central bank’s jumbo rate cut has been delivered in time to bring down inflation without pushing the economy into recession.
Some analysts have raised concerns about the outlook for the U.S. economy, warning that similar supersized rate cuts couldn’t avert the recessions of the early 2000s and the global financial crisis.
The Federal Reserve’s (Fed’s) decision to make a significant interest rate cut could have a wide-ranging impact on the US economy.
Here are some tips and insights on the move and its implications:
1. **Impact on Economic Growth**: Interest rate cuts are typically intended to stimulate economic growth by making borrowing cheaper. This can encourage consumers to spend more and encourage companies to invest. However, it is important to monitor whether the cuts are enough to drive sustainable growth without causing high inflation.
2. **Supporting Vulnerable Sectors**: Interest rate-sensitive sectors, such as housing and autos, may benefit directly from interest rate cuts. The government and financial institutions need to ensure that support is directed at these sectors as well to maximize the positive impact of the move.
3. **Monitoring Inflation**: While interest rate cuts can help boost growth, inflation risks remain. Investors and policymakers should be cautious and monitor inflation figures closely to ensure that additional measures are not needed in the future.
4. **Readiness to Adjust Policy**: If rate cuts prove effective in stimulating growth, the Fed should be prepared to adjust monetary policy in the future to ensure a balance between growth and inflation. Flexibility in policy will be key.
5. **Communicating Strategy**: Transparency in the Fed’s communication about the rationale and objectives behind rate cuts is critical. This will help maintain market confidence and reduce uncertainty that may arise among investors.
6. **Diversify Investment Portfolios**: For investors, with lower interest rates, there may be an opportunity to invest in higher-risk assets, such as stocks, as higher returns can be sought in the capital markets. However, diversification remains important to manage risk.
7. **Focus on Innovation and Productivity**: In the long run, measures to boost innovation and productivity will be important. Policies that support education, research, and development can help create a stronger foundation for economic growth.
Overall, the Fed’s rate cut could be a positive step towards a “soft landing” for the US economy, but it is important to remain vigilant about the risks that may arise and ensure that appropriate policies are taken to maintain the balance between growth and inflation.
In a decision that came as a surprise to some economists, the rate-setting Federal Open Market Committee on Wednesday voted to reduce its benchmark overnight borrowing rate by half a percentage point, or 50 basis points, to a targeted rate of 4.75% to 5%. One basis point equals 0.01%.
It was the first time the FOMC had cut by that much since the early days of the coronavirus pandemic, and, before that, the global financial crisis in 2008.
“I think this first 50 basis point cut is a clear signal in terms of the new direction. And hopefully that will unlock incremental amounts of confidence, and should obviously reduce cost of capital — and perhaps for some more strategic activity heading into the end of this year,” Denis Coleman, chief financial officer at Goldman Sachs, told CNBC’s Annette Weisbach on Tuesday.
“As we move into 2025, [it will] hopefully improve backlogs and more activity across the markets,” he said.
Asked whether the Fed’s rate cut may have secured a soft landing for the U.S. economy, Coleman said it was his hope and expectation that this would be the case.
“Right now, that is consensus,” Coleman said. “It’s always a very tricky job to manage economies through transition. But you know, inflation levels are coming down, unemployment is manageable, they’re starting to put through the rate cuts and sort of maintain a soft-landing trajectory.”
Dimon: ‘Put me on the cautious side’
Not everyone is convinced that the U.S. economy will continue to hold up over the coming months.
“I’m a long-term optimist. Short term, I’m a little more skeptical than other people that everything’s going to be great,” JPMorgan Chase CEO Jamie Dimon said in an exclusive interview with CNBC-TV18 released Tuesday.
“Markets are pricing things like they’re going to be great. Put me on the cautious side of that one,” he added. — CNBC’s Jeff Cox contributed to this report.