Fed Goes Big

When I was a sports reporter for the first decade of my career, we talked a lot about silly season. It’s the time of year—typically the off-season—when the fans and media need stories to talk about, but nothing is happening.

There’s lots of rumors about all sorts of stuff–potential trades, dissatisfaction with one’s current team, frustration with contract negotiations. You get lots of this “silly” stuff before anything official happens because fans are forward looking. They’re anticipating the next season.

Funny enough, you get something similar in the markets, because they, too, are forward looking. We’ve been talking about interest rate cuts for about a year now. We’ve talked about when they’d start, why they’re delayed, and whether we’ll get any this year. It’s not that silly to think about—this stuff has real-world consequences–but the wild back-and-forth does sometimes feel a bit silly.

Funny enough, you get something similar in the markets, because they, too, are forward looking.

The Federal Reserve this week made it official. They made the pivot. They cut interest rates. And, by going big out of the gate. Jay Powell and company reduced rates by a half percent. There had been fear that such a large move would signal the Fed believes the economy is weaker than we think. But, Powell was emphatic, despite this year’s rise in unemployment, the economy is doing well. His team just believes that rates need to be reduced to avoid having it turn sour. The market so far seems to agree with this assessment.

Let’s take a closer look at the situation.

Employment

Employment...

The eye-grabbing unemployment rate has shown signs of concern this year, rising nearly a full percentage point from last year’s lows. That’s usually not a sign of a healthy economy. However, there may be reasons for this increase including a rise in people entering the workforce. These people are ready to work, but they’ve not yet found a job.

The monthly jobs numbers have also been getting revised to the downside. Another sign of caution.

But, on the flipside, the weekly jobless numbers we see have been improving in recent weeks. They’re not showing a labor market in stress.

But, on the flipside, the weekly jobless numbers we see have been improving in recent weeks.

So, we have a mixed bag.

Business Commentary

Corporations, especially those in retail and consumer discretionary industries, have been flashing warnings for a while. The typical comments I’ve heard point to a consumer that’s not spending with the same vigor they did a year or two ago. But, it’s not clear whether the situation is getting worse.

Corporations, especially those in retail and consumer discretionary industries, have been flashing warnings for a while.

Small business owners seem to be saying similar things when interviewed by Federal Reserve banks. The most recent compilation of these anecdotes seemed to indicate business conditions were weakening.

But, then you look at some hard data like retail sales and GDP growth which both still seem quite healthy.

The picture is murky whether you’re looking at hard data or anecdotal evidence. Here’s the truth: that’s normal. None of us knows how the economy is going to unfold from here. That’s true for you and me. It’s also true for Federal Reserve officials.

The picture is murky whether you’re looking at hard data or anecdotal evidence.

Powell and his colleagues have done a marvelous job to this point of bringing down inflation without causing a recession. Now, they’re hoping to solidify that win by getting interest rates to a place where they’re not holding back the economy.

Today, these initial rate cuts are being celebrated. The belief is that they’re only going to enhance a strong economy. Hopefully, that’s how the story will be written when it’s all revised and done.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

This material is provided as a courtesy and for educational purposes only.

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.