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Powell's Pause: Why the Fed Should Hold Off on Rate Cuts in December

AInvestFriday, Dec 6, 2024 3:50 pm ET
2min read


Federal Reserve Chair Jerome Powell has hinted at the possibility of a pause in interest rate cuts in December, citing the US economy's resilience and the need to assess the potential impact of President-elect Trump's proposed trade policies. This decision, if adopted, could have significant implications for inflation, the US dollar, international trade, and the labor market. In this article, we explore the reasons why Powell and the Fed should indeed pause interest-rate cuts in December and consider the potential consequences of such a move.

The current state of the US economy has remained robust, with a strong job market and moderate inflation. Despite the Fed's September and October rate cuts, borrowing costs have not significantly decreased due to an uptick in bond yields. This surge in yields is likely a result of market expectations of higher inflation, fueled by President-elect Trump's proposed trade policies. Cutting rates now could further exacerbate inflation, making it more challenging for the Fed to control in the future.

By pausing rate cuts, the Fed can maintain a lid on inflation, which is expected to rise due to Trump's proposed tariffs. Economists estimate that these tariffs could increase consumer prices by 0.75% next year, equivalent to $1,200 in lost purchasing power per household. A pause in rate cuts would allow the Fed to monitor these inflationary pressures and adjust monetary policy accordingly.



A pause in rate cuts could also help stabilize the US dollar's exchange rate, making imports cheaper and potentially boosting US consumer spending. This move could counteract inflationary pressures from President-elect Trump's proposed tariffs. However, a pause might also hinder US exports, negatively impacting international trade. Therefore, the Fed must consider both domestic and international economic dynamics when making its decision.

A pause in interest rate cuts might also slow down wage growth, as lower borrowing costs typically lead to increased consumer spending, fueling demand for labor and driving up wages. However, a break could also help rein in wage inflation, which has been climbing due to labor shortages and increased competition among employers.

Powell's optimism about the US economy and the current inflation trend suggest that pausing rate cuts in December could help maintain a balance between economic stability and managing inflation expectations. By doing so, the Fed could avoid overstimulating the economy, which might otherwise lead to a resurgence in inflation. This pause would also allow the Fed to assess the potential impacts of Trump's proposed tariffs and trade policies on the economy before adjusting its monetary policy.

In conclusion, pausing interest-rate cuts in December would enable the Fed to better manage inflation, stabilize the US dollar, and assess the impact of Trump's proposed trade policies on the economy. By adopting a cautious approach, the Fed can maintain a balanced stance that supports both domestic and international economic dynamics. As an experienced investor, one should take these factors into account when making investment decisions, as the Fed's policy stance can significantly influence the broader market and individual sectors.

This article was written with the author's core investment values in mind, emphasizing stability, predictability, and consistent growth. The author prefers 'boring but lucrative' investments, valuing companies like Morgan Stanley that offer steady performance without surprises. The author also advocates for a balanced portfolio, combining growth and value stocks, and advises against selling strong, enduring companies like Amazon and Apple during market downturns. Understanding individual business operations and considering external factors like labor market dynamics, wage inflation, and geopolitical tensions is essential for making informed investment decisions.
Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.