The Fed funds rate was cut .50% after holding steady since July 2023.
After Fed Chair Powell announced the rate reduction, stocks shot higher with all major US stock indexes finishing over 1% for the week. Small cap stocks rose 2.47%.
Bond yields were interesting, at least for a couple of days. Prior to the rate cut, the 10-year US Treasury was yielding approximately 3.64%, then rose to 3.74% after the cut. The 2-year to 10-year US Treasury inverted yield curve that can signal a recession has un-inverted, at least for now.
There can be a lot to unpack after last week however not much has changed. Investors are questioning whether the economy will slow faster than previously thought as the rate cut was deeper than many anticipated. Were rates left higher for too long? If so, will Powell and company lower rates in time to soften the economic downturn and to provide confidence the Fed is on the market’s side. Some in the news media are suggesting the market now has a Fed “put,” meaning, the Fed will support the economy and the market at signs of weakness.
The Fed “Dot Plot” which signals the forecast of all Fed officials combined, is projecting a final “neutral” rate around 3%, higher than the typical 2.5%. A “neutral” rate is a rate that is neither supportive nor restrictive. It is the rate that market rates (US Treasuries) take their cue. Does this mean that the future of inflation may be higher than 2% once the dust settles? My thoughts have been, after we barrel thru the election, recession, no-recession debate, inflation will be persistently higher than 2%. The Millennials love to spend, and they are the largest generation. Imagine, when they start to inherit the massive amount of IRA money that will be passed down! Do you think they will not spend it?
An additional reason I believe rates may be higher after the dust settles, the amount of continuous new debt (new US Treasuries) that need to be issued, just to pay our annual budget deficits and the increasing amount of annual interest. As we issue more and more debt, we are counting on investors, corporations and foreign countries to continually purchase our debt. More on this in an upcoming blog.
I would expect increased market volatility until the current issues work thru the system, including the US Presidential election, the wars overseas and the future of tax policy in the United States.
With the markets hitting new highs and bond yields now attractive, this is not a time to be overly speculative or aggressive if you are approaching or into your retirement years. Knowing where you will receive your retirement income for the next couple of years may prove to be a really good idea.
Corporate Profits
Rate cuts, the election, geopolitical issues all are important by themselves however for investors, the main question is how will these issues impact corporate profits? In a few weeks we will hear corporations report 3rd quarter 2024 profits and more importantly, forecasts going forward. This past week we heard from FedEx suggesting a tepid outlook because of rising geopolitical issues. This is a reminder that there are many factors that affect corporate profits.
So, will the US economy slow us into a recession? Or will the economy reaccelerate as borrowing costs are lower today and perhaps going lower. What a corporation pays to borrow funds has a significant impact on its bottom line.
The summarize, there is a lot to digest, the Presidential election, wars overseas, the shortage of housing in the US and much more.
Possible?
It is my desire, hopefully not a dream, the significant divide between D’s and R’s in the US will subside in time. We have issues that need compromise and solutions, not fabrications to achieve objectives.
Please feel free to share our retirement blog with friends, family and colleagues.
