What does the Fed’s policy move say about the economy? What does it mean for the
markets?
Fifty is the new 25, or so the Federal Reserve (Fed) implied this week when they announced they were cutting interest rates by 50 basis points, lowering the upper bound from 5.50% to 5.00%. This was a bit of a surprise, as moderation in inflation and moderate economic data in recent weeks seemed enough to warrant some caution from jumping into rate cuts feet first. Of course, the statement accompanying the Fed’s decision struck a somewhat contrary, semi-hawkish tone by underscoring the need for a patient stance and approach to policy going forward as the data continue to evolve.
At the press conference following the Fed’s decision, Chair Jerome Powell appeared to backpedal, posturing that the Fed is in no “rush” to cut rates, and furthermore, insisted that half- point cuts should not be seen as the new pace. And yet, the updated “dot plot” of future policy expectations released along with the Fed’s decisions showed that the majority of Federal Open Market Committee (FOMC) members expect to cut interest rates an additional 50 basis points (bps) by year-end and by a further 100 bps in 2025. If these changes play out, they will bring the fed funds target rate down to 3.5% by the end of 2025.
Powell repeatedly called Wednesday’s 50 bps cut and projections for an additional 150 bps in cuts a “recalibration of our policy stance.”
“It’s a process of recalibrating our policy stance away from where we had it a year ago,” he explained, “when inflation was high and unemployment low, to a place that’s more appropriate given where we are now.”
“We don’t think we’re behind,” Powell said, “But I think you can take this [decision] as a sign of our commitment to not get behind.”
As a 48-year-old woman, I can get behind 50 being the sweet spot, for me and the economy. So could the markets—they ‘calibrated’ by gaining following the news, bringing the S&P 500 Index close to a 20% year-to-date return. With inflation moving slowly, but steadily, towards 2% and employment gains slowing, it was time to make a move lower to engineer the soft landing we hope for and deserve.
The rest of the economic data was “fire” as my kids like to say, meaning exceptionally good. Retail sales were up in August, fueled by online back-to-school shopping. August reports on housing starts and building permits were also strong. They rose 9.6% and 4.9% on a year-over-year basis, respectively, for the month. While existing home sales in August were down 2.5% to a 3.86-million annualized rate, a 10-month low, markets shrugged off the news following the Fed’s interest rate cut, which is expected to revive demand thanks to anticipation for lower mortgage rates.
Markets were tepid following the Fed’s announcement but have soared into week’s end and continue to demonstrate a “broadening” theme. Cyclical sectors like industrials, materials, energy and financials, as well as small capitalization companies, are moving higher with as much gusto or more than info tech, communication services and consumer discretionary companies, heretofore the market’s darlings. We are pleased to see this shift to a more broad-based rise in stock prices, as it reinforces the durability and longevity of the bull market we have experienced since the last bear market in 2022.
Speaking of longevity, and with 50 being the new 25, it is a good time for us to make plans to connect before year-end to review your portfolio and overall strategy. It has been easy to let the big winners in growth and tech names drift higher over the last 18 months, and some rebalancing may be in order. Likewise, it is always good to review interest rates on your outstanding debt so you can be poised to leap on refinance opportunities. Finally, money market yields may be dropping, but short- and intermediate term bonds are worth investigating as upgrades to any cash positions you consider to be “sleep at night” or “perma” (as opposed to funds you want on the sidelines for short-term expenses). As “The Great One” Wayne Gretzky liked to say, “Skate to where the puck is going, not where it has been.”
Thank you for your interest in our weekly investment commentary. If you would like to speak personally with a member of your advisory team, please call 833.RWA.PLAN (833.792.7526).