September 20: What’s in a rate cut?

In which, the Fed finally cuts rates, but for whom? America’s dual economies continue to diverge.

What’s in a rate cut?

Well, it happened, they finally did it. After a winter, spring and summer of speculation and roller coaster markets rising and falling on that speculation, the Federal Reserve cut the interest rate… and how. The 0.5 point cut was twice what most observers expected and the markets reacted as you expected they would: they bounced. 

So, did the economic “October surprise” come in September just in time to save Kamala Harris’ bacon? Some snap polling would suggest so, but as with most things in this life, the picture is a little more complicated than that. And, after four years of Bidenomics, I’ve generally learned to be skeptical of any claims the administration makes about how awesome the economy is.

The last few months, I’ve commented on this idea of parallel American economies, one focused on macroeconomic indicators, one on microeconomic indicators. The two sets of indicators definitely interact, and in a healthy economy they would move largely in parallel. But what we’ve been seeing post-Covid is that those two sets of indicators seem to be diverging such that the average American household is under increasing stress (psychological and economic), while those with access to the stocks and technologies driving the markets continue to grow their wealth. In the initial reporting around the rate cut, I see no reason to change my analysis on that point. The overpriced housing market? Don’t expect this to help anytime soon, observers say. Inflation and wage? Not likely to close the gap. In fact, were Kamala Harris to be elected and continue to advance the Biden economic policy, the inflation-wage picture is likely to look worse.

So, while the rate cut will likely give markets a boost, and certainly take the pressure off Uncle Sam on servicing the national debt, that “better deal for the middle class” the Biden-Harris administration talked so much about continues to seem like just that: talk.