What is behind the Fed's big move?

The Fed started big,...

At its meeting last week, the Fed began its cycle of interest rate cuts with a major step of 50 basis points (see our briefing). This is all the more remarkable given that Fed Chairman Jerome Powell cannot see anything in the economy that points to an increased likelihood of a downturn, as he noted in the press conference after the meeting.

...because it sensed to be rather late ...

The decision to take this big step is partly explained by the fact that if the employment report for July had been received a few days earlier, interest rates would probably have been cut in July: the Fed meeting was on July 30-31, and the July employment report was published on August 2. It showed a 0.2 percentage point increase in the unemployment rate to 4.3% and a disappointing +114k jobs gain. Thus, the Fed wanted to take a big step to possibly make up for lost time.

... and ran the risk of falling back behind the ideal of 2019

However, the overall economic environment at the time of last week's FOMC meeting appears more important. Fed Chairman Powell repeatedly referred to 2019, the year before the coronavirus pandemic and the peak of the last business cycle. The economic data in 2019 apparently comes close to the optimum from the Fed's point of view. The unemployment rate in 2019 was 3.7% on average, employment was still growing by almost 170,000 per month, and there was no significant inflationary pressure.

The current data situation is somewhat less favorable: at 4.2%, the average unemployment rate in the last three months was higher than in 2019, while the job gain of 116 thousand was noticeably lower. The number of job openings has fallen in recent months and, at 1.2 (still a very good figure), is at the 2019 level. However, core inflation is still elevated and, at 2.6%, above the Fed's target.

For full text see attached PDF-Version.