The Fed sets the stage for an interest-rate cut in September, plus an important election reminder.
Federal Reserve Chair Jay Powell’s speech at the Jackson Hole Economic Policy Symposium this morning did not disappoint. It was widely anticipated he’d be announcing the imminency of interest-rate cuts, and he delivered. “The time has come for policy to adjust,” Powell said during the Fed’s annual retreat. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
Powell did not tip his hand at the size of the cut expected in September, but the market has decided it will likely be a downshift of 25 basis points from the current federal funds target range of 5.25% to 5.50%.
While interest rates have certainly been much higher over the course of economic history, the current level is the highest in more than two decades, and investors, consumers and businesses alike will all welcome the relief a shift lower will provide.
Notably, Powell has grown much more confident that inflation will return to the central bank’s 2% target. On a less positive note, he echoed economists’ warnings that the labor market poses an increasing threat to the economy after months of slowly rising unemployment. “We do not seek or welcome further cooling in labor market conditions,” Powell said. However, he voiced optimism about the Fed’s chances for engineering a soft landing during his speech, saying “while the task is not complete, we have made a good deal of progress toward that outcome.”
It was a sunny end to a fairly benign week in the financial markets, which have retraced the volatility from a few weeks ago to return to all-time highs. Other economic data announcements were consistent with the story of a solidly average economy, as manufacturing barometers reflect some contraction, while service sector activity measures are in expansion territory.
Existing home sales in July hit a seasonally adjusted annual rate of 3.95 million, up slightly for the month and above consensus views. They are still down 2.5% year over year, and the median sales price jumped 4.5%, the 13th straight month of increases. New home sales for July leapt up as a drop in mortgage rates boosted demand, offering more evidence that the impending rate cuts will be a catalyst towards maintaining momentum in economic growth.
Indeed, concerns about growth triggered by softer employment data (and recessionary indicators) at the beginning of the month have abated, at least for now, as confidence in a soft landing for the economy is increasing. With that, we are seeing broadening in the markets, as energy, financials and real estate stocks are enjoying gains lifted by hopes for falling interest rates. And if the white-hot information technology and communication services sectors are taking some bumps and bruises on a given trading day, the pain does not last, as buyers seem to emerge at signs of weakness in these still-coveted names.
With conventions for both the Republican and Democratic parties now behind us, we are entering the election season in full swing, and all eyes will be on the candidates for more details on the economic planks in their platforms and clues to how these policies will affect investors.
Recall our advice to avoid playing politics with your portfolios, and to stay long-term in your investment thinking even as you are caught up in the passion of choosing the next best leader for our country. And remember that election promises are often reset with the realities of the intense legislative process required to pass bills in Congress. Even so, it is fair to consider the potential impacts of the ideas under discussion. We are already factoring the potential expiration of the Tax Cuts and Jobs Act and proposed changes to capital gains tax rates into our wealth planning process. With markets near highs and taxes at lows, this is a good time to consider your planning moves, as neither of these beneficial conditions may last forever. Thank you for your interest in our investment commentary and for your relationship with us. If you would like to speak personally with a member of your advisory team, please call 833.RWA.PLAN (833.792.7526).