Easing Like Sunday Morning

On September 17th and 18th, the Federal Reserve will meet and likely ease the interest rate on Federal Funds. I’m picturing the meeting taking place poolside, with Chairman Powell wearing floaties and beverages being served with umbrellas and freshly sliced citrus. Waist-deep in the shallow end are the Commodores singing “Easy Like Sunday Morning.”

After all, since they last raised rates in July 2023, the Fed has kept rates at their current level while inflation has declined significantly, employment has remained healthy, and GDP looks to be growing near 3%.

Cheers, Fed! Enjoy this moment. You’ve earned it.

Where exactly are we?

Last week, Producer Prices (a leading inflation indicator) and Consumer Prices (a concurrent inflation indicator) came in at low levels. Producer prices have risen by 0.3%, and consumer prices have risen by 0.1% each over the past three months.

Unemployment is 4.3%, above the 3.5% rate of a year ago, but still very low by historical standards.

Over the last three quarters, GDP has been 3.4%, 1.4% and 2.8%. The Atlanta Fed’s GDPNow rate, as of August 8th, is 2.9% for the 3rd quarter.

What does this mean going forward?

With inflation back to or approaching the 2% target rate, the Fed can lower their Fed Funds rate closer to their neutral rate of 2.8%. This neutral rate is a moving target based on current economic conditions. As conditions change, their target rate changes. Suffice it to say we are currently about 2.5% above the neutral rate. This allows the Fed to significantly lower rates over the next 6 to 12 months.

A solidly growing economy with interest rates no longer acting as a headwind is good news. Seeing rates move lower by 2+% would be great news. Borrowing rates would come down for autos. You should see housing activity pick up. Those homeowners with mortgage rates in the 3’s could start to look for their next home and not see their mortgage rate rise too much on the new loan. New homeowners could have an easier time getting an affordable mortgage. Corporations could refinance at relatively low rates, as could real estate investors. This would drive higher profits, which would support current stock prices and corporate bonds.

What should investors do?

In the big picture, you shouldn’t do anything differently. If you have a long-term plan for your portfolio, none of this should have a material impact on your strategy. Perhaps you can do some tweaking. Look for opportunities to invest cash in bonds to lock in rates. High dividend-yielding stocks might be attractive. If a stock paying a 5% dividend appears secure, it becomes more attractive when cash rates are under 3%.

On the other side, if your portfolio has not been aligned with your long-term strategy and you’ve been waiting for better buying opportunities, you may be waiting a lot longer. You could consider a plan that will move you into alignment, perhaps over the next year or so.

Good times continue until they don’t!

As positive as the horizon looks economically, there is no guarantee that markets will follow or for how long they will follow. Economic weather can be as unpredictable as Indiana weather. At some point, the wind will blow, and the rain will pour. And, we’ll leave our umbrella-ed drinks outside while we hurry inside to get under shelter.

That is why I emphasize having a long-term plan and staying the course. For now, find a pool, inflate your floaties, and enjoy the weather as the Fed will be easing like Sunday morning. Cheers!

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