The US economy is fine. We now know that the interest rate cut for September 2024 is a half of one percent or 50 basis points. Federal Reserve Chairperson Jerome Powell made it very clear on multiple occasions during his press conference yesterday that the interest rate cut determined by the Federal Open Market Committee (FOMC) is intended to support the continued growth and stability of a solid US economy. Chair Powell explicitly stated, “our economy is strong overall.” The FOMC believes that these rate cuts move the targets for the Federal Funds Rate to a position that supports the labor market and the fight against inflation at the same time.
The FOMC target for the Federal Funds Rate since 2021 has been aimed at bringing inflation down despite the unfortunate reality that these high rates would negatively impact the labor market. The Fed has stated throughout this prolonged fight against inflation that they believed the labor market to be capable of absorbing the higher interest rates through reduced job creation instead of through job loss. Yesterday’s press conference included a brief explanation from Chair Powell that made it clear that this has been successful overall, but the data shows that this trade-off is near a breakeven point. Further deterioration in the labor market would be of a destructive nature and the Fed believes that it can continue to reduce inflation through 2024 and 2025 to a level of 2.1% while simultaneously maintaining unemployment levels below 5%.
There was a lot of debate about the size of this rate cut, with some concerns that it was already too late or that a big cut could allow inflation to return. The FOMC published their economic projections along with their decision and they clearly demonstrate that the committee believes they are in a good place to shift the balance of their policy from fighting inflation to maintaining growth and sustainability in both price levels and employment. It is worth noting that one of the committee members, Michelle Bowman, who was appointed by President Trump in 2018, dissented from the other voting member’s decision. She was the first member to vote against a policy decision in two years and the first Fed governor to dissent since 2005. She stated a preference for the 25 basis point cut, but we won’t fully know her reasons for dissenting until the minutes from the meeting are released in approximately 3 weeks or she decides to share her thoughts with the press.
The impact of this rate cut, as with all monetary policy changes, will take months to filter through the economy. The stock markets saw a brief rally after the announcement followed by a sharp decline at the end of the trading day. You may be wondering why the market would decline after a big rate cut, but it’s important to remember that investors and markets in general have been anticipating these cuts for weeks. Our analyst, Brett Winnefeld, reminded us all that the old adage goes, “buy on the rumor, sell on the news.” Those watching the bond markets probably even noticed that yields on the 2yr and 10yr treasuries rose after the news. The big question is what happens the day after.
Although the stock markets move immediately when presented with new information, the financial markets tend to move more slowly. According to the FOMC Summary of Economic Projections (SEP), two more cuts are expected this year and anywhere from 3-5 cuts are possible in 2025. The impact of these changes won’t be fully understood for a while. In the meantime, stay focused on your financial goals and your long term strategies. Speak to a trusted financial advisor before making any large changes and try not to get caught up in the emotions or the headlines.
