Going into Wednesday’s Fed meeting opinions were equally split. You could find compelling reasoning for why a quarter-point cut was the way to go, and equally compelling arguments for a half-point cut. Heck, some analysts made a good case that cutting rates was a mistake. But Powell and company seem to subscribe to the mantra of ‘go big or go home.’ A half-point it is!!
Economists being economists, only 9 out of the 101 economists surveyed before the meeting thought we’d see such a large reduction. But probably more surprising than the half-point cut was what the Fed told us about future policy changes. Two key points here:
- They expect to cut rates by another half-point by year-end.
- On average the committee members see another full 100bps of cuts in 2025.
But the Fed members are all over the board individually. As you can see from the range of estimates in 2025, two board members see rates under 3%, while one member is penciling in a 4.25% rate.
The policy debate will roll on, as it always does, with the focus now shifting to the size of the reductions in 2025. As we noted last week, it will really all be about employment. The key comment from Wednesday’s announcement was:
“The committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance, and (the FOMC) is strongly committed to supporting maximum employment…”
As Powell noted in his press conference, the slowdown in the labor market “bears watching, and we’re watching.”
Market Implications?
The natural question then is what do rate cuts mean for the markets? At a high level, history tells a mixed tale. The chart below from Morgan Stanley shows the S&P 500 performance after the first rate cut going back to 1973.
Something for everyone!! It’s really a question of whether the economy falls into a recession after the first rate cut or not. Not exactly rocket science.
On this score the current data is favorable. The latest unemployment claims numbers have improved modestly….
….and the tracking estimate for third-quarter growth is running at +3.0%.
Hardly recessionary stuff….but we shall see.
Let’s close with the following chart from TheMacroTourist. It shows asset class performance sixty days after the first rate cut in both a no-recession and a recession scenario.
This chart proves that averages can be dangerous!!
(Other) Charts We Found Interesting
- The bearish contingent argues that the Fed only starts cutting rates right before a recession starts. Well, the history here is a little more complicated. As with everything in economics, it depends.
- I’m finding there aren’t many advantages to getting old, but when I look at the chart above, I can’t help but notice that the 1998 easing cycle is missing. The Fed was heavily criticized for stoking the flames of the tech bubble with these rate cuts, but at the time it felt like the global economy was on the cusp of a crisis.
- If we avoid a recession over the next twelve months could we still see additional rate cuts? It’s certainly possible – real (inflation-adjusted) rates are relatively high.
- On Friday we learned that Constellation Energy plans to restart the Three Mile Island nuclear plant. Microsoft will use the power generated over the next 20 years to feed its data centers/AI initiative. Why restart an old plant rather than build a new one? The cost to build nuclear in the U.S. is astronomical!!
- Circling back to the labor market again. While the headline jobs figures tell a mixed tale, there’s no question that hiring in tech is weak.
- When should you take Social Security? A chart from J.P. Morgan’s Guide to Retirement illustrates the tradeoffs.
- How long until daytime power in Texas is basically free?
Have a good weekend
Charles Blankley
Principal
Chief Investment Officer
Gemmer Asset Management LLC
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