The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.
We will do everything we can to support a strong labor market as we make further progress toward price stability. With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2 percent inflation while maintaining a strong labor market. The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions.
This was Federal Chair, Jerome Powell in his Jackson Hole speech yesterday, unambiguously declaring that the Fed is now on course to lower interest rates. Expectations for rates have dropped since his speech (see chart below).
History tells us that the first rate cut will be small. It's less about the magnitude and more about the message that it sends to the market. It means the long fight over inflation is over. Although rates are highly unlikely to go back to the unfathomable levels we saw in 2020/2021, we should see some relief from their levels today. Corporations, businesses, and investors can start making decisions knowing rates are likely to continue on their downtrend. It also sets the vibe of how consumers feel about the way forward. And as I've said in the past, sentiment is a big factor in markets.
It’s the vibe of it. It’s the Constitution. It’s Mabo. It’s justice. It’s law. It’s the vibe and ah, no that’s it. It’s the vibe. I rest my case. - Dennis Denuto
The bears would tell you that it was the Mag 7 holding up the stock market, and when their time was up, the entire market would give way. Again, the bears were wrong. Since Powell's speech, the S&P 500 is up 1.15%, Nasdaq is up 1.47%, the Russell 2000 is up 3.19% - you get my drift. These relative differences in performance are about investor preferences, rotation, and shifting of allocations. Investors are not running for the hills. In fact, were seeing more stocks going up than before. It's called breadth, and it's back.
The question is, what's next. We've had the landing. It was a soft. It's done. It's over. Get over it. We now move onto the next phase of this cycle. Here's a great chart on rate cuts and what they mean for the economy and the stock market.
There are no guarantees in markets. Rate cuts don't spell doom and gloom for the economy. In the 17 instances of rate cuts over the last 50 or so years, we see a recession 58% of the time. The stockmarket however, is up 77% of the time notwithstanding a economy recession. We've seen a wide range of outcomes over the last little while, and the reality is that we'll probably see something play out that's between these extremes.
Right now, the economy looks good. People are employed, consumers are spending, large corporates are cash up and they have locked in their debts at low rates until 2028 - far from a recession,but let's not get carried away.
There is no playbook here, rate cuts could be good for the economy and financial markets, and they could be bad. Understand the range of outcomes and make decisions accordingly.
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