Last week, the Federal Reserve's interest rate cut attracted widespread global attention and sparked discussions about whether U.S. inflation will make a comeback.

Despite the Fed's emphasis on the positive outlook for the U.S. economy and downplaying risks such as secondary inflation and economic recession, the contradictions between the pace of policy changes and economic data are difficult to reconcile.

On September 18th, after concluding a two-day monetary policy meeting, the Fed announced a rate cut and stated in its post-meeting declaration that it had "greater confidence" in the sustainable progress of the inflation rate towards the 2% target, believing that the risks of achieving full employment and price stability are roughly balanced.

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Fed Chairman Powell repeatedly emphasized after the meeting that "the U.S. economy is generally strong" and "U.S. economic activity continues to grow steadily."

Previously, the market widely expected the Fed to start a monetary policy shift at the September monetary policy meeting with a prudent pace of cutting rates by 25 basis points.

Just before the meeting, U.S. media suddenly released news that the Fed might cut rates by 50 basis points.

As the rate cut "fell to the ground," this news was also confirmed.

Since then, the market's skepticism about the Fed's significant rate cut has been increasing.

Significant rate cuts by the Fed often occur when the economy faces a major crisis.

For example, when the U.S. technology bubble burst at the end of 2000 and when the U.S. subprime crisis erupted in 2007, the Fed cut rates by 50 basis points, and in March 2020 when the pandemic broke out in the U.S., the Fed urgently cut rates by 150 basis points in less than two weeks.

In contrast, the economy does not seem to have slowed down significantly from public data.

The U.S. second-quarter real GDP grew by 3% year-on-year, and there is no basis for "preventive rate cuts," nor is there an emergency situation like the pandemic as a "trigger condition."

Therefore, the market suspects that the Fed has reservations and is vague about the real reasons for the rate cut.

U.S. Republican presidential candidate Trump said after the rate cut that the magnitude of the rate cut is "very unusual," either indicating that "the economy is very bad" or that "they are playing politics."

This statement is thought-provoking.

In comparison, the possibility of the rate cut causing secondary inflation seems less important.

Generally, rate cuts will reduce the cost of capital, increase market liquidity, and then stimulate consumption and investment demand, pushing up price levels.

At the same time, the release of liquidity may lead to wage increases and the rise in raw material prices, which will be transmitted to the final product prices.

In particular, the rise in housing costs has a significant impact on the overall inflation level in the U.S.

In addition, structural issues in the U.S. economy, such as supply chain disruptions and labor shortages, have not been completely alleviated, and these factors may also exacerbate inflationary pressures.

Data from the U.S. Department of Labor shows that the U.S. Consumer Price Index (CPI) rose by 0.2% month-on-month in August, the same as the increase in July.

The core CPI rose by 0.3% month-on-month in August, expanding by 0.1 percentage point from the increase in July.

Among them, the U.S. housing index rose by 0.5% month-on-month in August, becoming the main driving force for the overall CPI increase.

Some analysts believe that the stickiness of U.S. inflation has increased the risk of secondary inflation in the U.S., and "the cooling of U.S. inflation may be temporary."

In fact, the Fed is well aware of the inflation issue.

Powell hinted after the meeting that the long-term neutral interest rate may be much higher than before the pandemic, "and I don't feel it will return to the low neutral interest rate level."

Former U.S. Treasury Secretary Lawrence Summers recently said that the financial market has greatly overestimated the loose monetary policy that the Fed is about to adopt.

Summers believes that the potential threat of inflation may prevent the Fed from lowering interest rates along the expected path shown in the dot plot in the next few years.

Next, the Fed still needs to "tightrope walk" in grasping the pace of rate cuts.

Reducing policy restrictions too quickly may hinder the cooling of inflation and cause secondary inflation, while reducing policy restrictions too slowly may excessively weaken economic activity and employment, leading to a recession.

Once again, if it is indecisive, it may trigger "stagflation."

The Fed wants "U.S. economic activity to continue to grow steadily," which is not an easy task.