Quote:
Originally Posted by BraveBold
I consider it all pretty simple but it has to be extended beyond the past week. The great fear for markets over the past couple years was stagflation. Every datapoint that negates that fear is a positive. The second great fear was (is) a disconnected Fed. That is, a Fed unwilling to respond quickly enough to changes in condition. As the stagflation fear has mostly subsided (with inflation on a clear downward trend) the question is whether the Fed will adequately respond to rapid declines in demand.
So commentary last week on watching labor markets was seen as dovish. In other words, a labor market softening portends demand declines - and that would solidify the view that rates must adjust lower in response.
The lagged impact of rate reductions this cycle is simply that, a lag. The lag is longer because of the stimulus boost to excess savings and the persistence of spending even as that savings pool depletes. Once the demand side eases down further we can expect an even more rapid decline in inflation.
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Thanks for this viewpoint, but I still don’t understand cutting rates with an expected 2.9% inflation rate. GDP and unemployment both look good, so I still fail to see why cutting rates won’t ramp inflation back up, especially since the last percent will be hardest and longest to come down.