EconoScope | Fed's aggressive rate cut reveals sluggish U.S. economy: analysts

(ECNS) -- The Federal Reserve (Fed) is clearly aware of the weakness in the labor market; otherwise, it wouldn't have resorted to such an unconventional move by cutting rates by 50 basis points right from the start, analysts at China International Capital Corporation Limited told China News Network.

The Fed announced its decision to lower the target range for the federal funds rate by 0.5 percentage point to 4.75 to 5 percent at 2 p.m. EDT on Wednesday.

As the Fed's first rate cut in four years, the decision, though expected, has been interpreted as an unusually drastic shift. This move likely aims to guide the economy toward a “soft landing.”

Yang Delong, chief economist at First Seafront Fund, told China News Network that this rate cut signifies a shift in the Fed's monetary policy focus from combating inflation to stabilizing growth, so as to prevent a “hard landing” for the U.S. economy.

Undoubtedly, the current labor market weakness is a key risk factor drawing major attention in the U.S.

U.S. economic data for August generally fell short of expectations. Although inflation has been steadily easing, the labor market has cooled more quickly, with the unemployment rate climbing from 3.7 percent at the end of last year to 4.2 percent this August.

Amid multiple risks, the Fed lowered the 2024 U.S. GDP growth forecast from 2.1 percent to 2 percent in June, while raising the unemployment rate forecast for 2024 from 4 percent to 4.4 percent.

Surprisingly, the three leading U.S. stock indices all ended down on Wednesday, failing to meet expectations for a market boost from the rate cut.

Yang believes this indicates that investors are more concerned about the slowdown in U.S. economic growth than previously anticipated.

“Fed rate cuts (is) to soften blow of spiraling U.S. debt, but it won’t solve the $35 trillion problem”, according to Market Watch, a Dow Jones company.

In the face of a foreseeable recession, the Fed may accelerate rate cuts to find a new balance between curbing inflation and mitigating recession. This approach could help the U.S. manage the impacts of rising debt.

The Fed's rate cut is poised to have far-reaching effects on the global economy.

Other economies have historically been pressured by the dollar's dominance, having to follow the Fed's rate hikes passively, which hindered their own growth. Now that the Fed has begun a rate-cutting cycle, it could help mitigate the negative effects of previous hikes and support a global economic recovery, Zhao Xijun, co-director of Research Institute of Capital Market at Renmin University of China, told China News Network.

For China, Yang noted that the recent appreciation of the RMB against the U.S. dollar has eased the pressure to maintain exchange rate stability, creating some room for China’s central bank to employ more monetary policy tools to boost the economy.

It’s worth mentioning that before the Fed's rate cut, major global central banks, such as the European Central Bank and Bank of Canada, had already undertaken several rounds of rate cuts.