Why Did the Fed Cut Rates Again?

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00:00So why did the Fed just cut interest rates again?

00:03I think the main reason is that they more or less promised they would.

00:07And the Fed doesn't like to shock the markets.

00:10The data is ambiguous at best on whether a cut this time was warranted.

00:16You have got signs of labor market cooling,

00:18but we've also got persistent above-target inflation.

00:22So those are the two elements pulling in different directions.

00:25On top of everything else, we don't have good data at the moment

00:27because of the government shutdown.

00:28It's like steering blind in a way.

00:31We've settled into a mode, really, where inflation is sort of stuck at roughly 3%.

00:36Powell emphasized that the inflation target is still 2%.

00:40The question is, will investors continue to believe him?

00:45And the longer we stick at 3%, the harder it becomes to persuade people.

00:49Once people expect a higher rate of inflation,

00:53you're nine-tenths of the way to getting higher inflation

00:56because their behavior changes to accommodate the expectation.

01:00If people get the idea that the Fed is so worried about what's happening in the labor market

01:06that it's willing to tolerate 3% inflation indefinitely,

01:11then that will be a huge setback for monetary policy.

01:14I think that's the biggest single risk.

01:16Once you're at 3% and you get trouble in the labor market, do you then go to 4%?

01:20Once you're at 4%, if there's trouble in the labor market, do you then go to 5%?

01:25So I think there really is a danger here of a slippery slope.