The Fed has decided to go for broke. They’re going big, slashing interest rates by a full half percentage point. How does this affect you and your portfolio?
The Fed cut of 0.5% is actually their very first cut in about four years. For the last few years, they’ve been focused on inflation and for good reason. Now they’re charting a course for another two cuts, and it’s expected that there’ll be a full 1% cut by the end of the year, followed by more cuts maybe in 2025. The new interest rate range now is 4.75 to 5% as of today on Wednesday, September 18. What does this tell us? It tells us the Fed has confidence that inflation is heading to 2%. Their preferred measure, the personal consumption expenditures index is already down to 2.5% since July, and they’re expecting inflation to drop as much to 2% sometime next year.
Clearly, the Fed is also concerned about softening employment. Unemployment has risen gently from 4 to 4.4%. Now, there was a time when we would be celebrating 4.4% from the rafters, but in today’s tight labor market where there’s not enough labor to go around, 4%, which is considered full employment, it’s a great target. 4.4% indicates a slight softening. They feel that this is the time to take some action before this gets out of hand.
As investors, how does this affect you? First and foremost, if you’re living on bank interest rates, ultra short term money, your interest rate will probably drop by half percent really soon. In fact, two year treasuries are already seeing a drop in the yield to maturity. They’ve been rallying in value today. Gold has rallied, which kind of makes sense because on the margin some of that is bought using debt. Mortgage rates hopefully will ease. Now, mortgage rates look out 20, 30 years, so there’s not a one-to-one relationship, but as the markets expect that full 1% drop this year and even further drops next year, that should have a softening impact to mortgage rates and that also should help the unemployment, help keep the economy running on all eight cylinders.
And as expected, the stock market had a little bump today. This is not at all unexpected. Markets anticipated something between a quarter and a half percent cut. Had the cut been quarter percent, the market probably would’ve done nothing or maybe even dropped a little bit. It’s a full half percentage point. The market’s correcting for the information. This is classic efficient market theory and really in the long term means absolutely nothing. The economy is running on all eight cylinders. It has softened a little bit. The Fed has somehow managed to engineer a soft landing.
If you have questions about how this would affect your bonds, your stocks, or your other investments, please reach out to me. Call me, email. We wish you the best of investment success. Thank you.
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