Laura: I’m not sure where to start. The Election, The Fed’s FOMC meeting?
Will: Ha! Seriously, this was quite a week. Prior to the election there was considerable uncertainty about the path forward, not only for interest rates, but for the economy as a whole. It seemed the whole world was watching for the outcome, which many experts thought would take weeks or possibly even months to finalize. As it turns out, the results were overwhelming and clear. And now at the time of this writing, the only outstanding question is who will win the House majority. There are six seats still up for grabs.
Laura: And what about the Fed?
Will: The Fed’s FOMC meeting occurred a day late (meetings are typically held on Wednesdays, but this session was pushed back by a day, a decision speculated to be because of the election). We just heard from Chair Powell, who infamously remains “data dependent”. One thing, however, was quite clear: he would not comment on anything political. When asked if he thought the election results indicated American’s thoughts around the economy, he responded that he would not comment on the election. When asked if he thought his job was in jeopardy with the new administration, he flatly answered “no” (though he did clarify later that any demotion of the Fed Chair is not permitted by law.) When asked another question centered around politics he responded he was “not going to get into any of the political things here today.”
Laura: Ok, so sounds like he wanted to steer clear of anything political. Did he talk about the economy in the context of the new administration?
Will: He did not but he did say the Fed does model what impact fiscal policy would have on monetary policy. As of right now there is nothing to model because they don’t know the policy, and they will start their analysis once new policy is announced and ultimately legislated. The election, therefore, will have “no effect” in the near term, and Powell implied it would take some time for legislation to take effect and laws to be implemented. He did comment that the current fiscal “path is unsustainable” and added that he is not the first Fed Chairmen to make this comment.
Laura: So what about rate cuts?
Will: Powell implied there is one more to come this year. Currently, the Statement of Economic Projections (SEP) has four 25bps rate cuts estimated for 2025. Powell noted “we are on a path to a more neutral” policy rate, but that the neutral rate is more elevated than had been previously thought (as evidenced by the changing dot plot). At the time of this writing, the Fed Fund Futures rate is approximately 3.5% at the beginning of 2027. Powell was asked if he could rule out a rate hike next year and quickly replied that the Fed does not rule out anything, but that it was not in their plan. “We are not on any preset course,” he emphasized, saying the committee would continue to make decisions meeting by meeting. At this point in time, it does seem that the Fed is well positioned to deal with headwinds that may arise. The economy is expanding solidly, the labor market is more in balance, and inflation has eased, all of which have boosted confidence that inflation is headed towards the 2% target and that easing rates is the correct path. Now they must determine the pace of those rate cuts. 4 25bps cuts seems reasonable and appropriate although “it depends” on so much.
Laura: What else was notable?
Will: When asked about the “right” level of interest rates (US Treasury yields), Powell stated that he does not have anything to say about bond yields, though he did say that inflation expectations are in line with where they want them to be while noting the 5Y5Y rate (a preferred measure of inflation expectations.) He commented that the 3 month average and 6 month average core PCE readings are showing further progress towards the 2% goal, even if the 12 month average appears stuck. At this point, inflation is mostly coming from housing services (rent) in a form of “catch up” inflation, i.e. rents were frozen for a period of time and now are being increased at increased rates. The Fed is also watching financial conditions and noted that yields have risen over the past six weeks, but do not see anything that would indicate financial conditions have tightened materially.
In a rare moment of levity, when asked about stagflation the Chair responded that the plan is to avoid it! It’s a very difficult problem, but based on their current policy and what they are seeing in the data, they do not seem to be headed for this conundrum.
All told, in a highly anticipated election followed by a highly anticipated FOMC meeting, we come away with more of the same, and more “Well, it depends…”
*Important Disclosures
Investing involves risk including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied, or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent. All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not consider any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data. Bonds generally present less short-term risk and volatility than stocks but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. ©2024 State Street Corporation – All Rights Reserved. This commentary is provided for use by SSGA to CalTRUST.