The Federal Reserve (Fed) finally cutting interest rates (after 420 days without a move, but who’s counting?).
On Wednesday, September 18th 2024 the Federal Reserve cut its policy rate by 50 basis points to 4.75%–5.00% from 5.25%–5.50%.
Immediately following the announcement, stocks made an intra-day all-time high, and the S&P 500 closed at its 39th all-time high of 2024 (and first since mid-July) yesterday. The index is up 20% since the start of the year.
While the interest rate cut matters for deposit and savings accounts, short-term certificates of deposit and money market yields, bond markets were already expecting a big shift in policy.
That means that even though the Fed has officially kicked off the rate cutting cycle, you may not see much movement in places like mortgage rates. Indeed, mortgage rates have already declined by about 100 basis points from their year-to-date highs. Further, 10-year Treasury bond yields have actually moved higher over the past few trading sessions.
What happened at the September Federal Open Market Committee (FOMC) Meeting?
The Federal Reserve changed their policy stance to ensure that the economic cycle continues.
A 50-basis point move sends a clear message that the Fed wants to support growth. But a bigger move should not be taken as a sign of bigger problems in the economy.
Powell said it himself in his news conference, explaining that this policy pivot is a “recalibration.” In other words, the decision to cut interest rates is a normalization of monetary policy from a restrictive level and not an urgent shift to combat a crisis.
Powell added that, “the U.S. economy is in good shape...It’s growing at a solid pace. Inflation is coming down. The labor market is in a strong place. We want to keep it there. That’s what we’re doing.”
Despite some stabilization, the recent slowing in the labor market now stands as a bigger risk than inflation. The unemployment rate is still low at 4.2%, but that is up from 3.7% at the start of the year.
Rate cuts stand to oxygenate the economy and support the labor market. They are designed to ensure this economic cycle continues. The median FOMC participant is penciling in 50 basis points of further cuts across the remaining two meetings this year.
What can we learn from history about cutting cycles?
The Fed could deliver a lot of rate cuts.
The Federal Reserve is likely to achieve a soft landing. The average soft landing cutting cycle over the past 53 years has seen about 200 basis points of easing, but in the “modern” era it has only been 75 basis points. This cutting cycle, if it meets expectations of another 200 basis points of easing through 2025, will be the deepest “soft landing” cutting cycle since 1984-1986.
Today’s labor market is in line with past cutting cycles.
Over the last seven cutting cycles, the median three-month moving average number of jobs added to the economy was 116,000 per month. Where does that metric stand today? 116,000 jobs added per month. Undoubtedly, the labor market is slowing but easier monetary policy should support labor markets before a more aggressive slowdown in growth hits the economy.
Stocks and bonds tend to do well.
Stocks: Since 1980, five of the 10 best years for the S&P 500 happened when the Fed was cutting rates without a recession (1985, 1989, 1995, 1998, 2019). The Fed has cut rates 12 times when the S&P 500 was within 1% of its all-time high. The market was higher one year later all 12 times (with a median return of 15%).
Bonds: Since 1970, high quality bonds have outperformed cash by an average of 10% in cutting cycles.
Cash: It's likely time to reevaluate cash reserves in excess of short-term liquidity needs and emergency funds for more attractive opportunities.
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