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 | Weekly Market Update September 23, 2024
| Outlook The Federal Reserve lowered its target interest rate for overnight lending by 50 basis points (i.e. 0.5%) in what we believe to be the start of a rate lowering cycle. Typically, the Fed Funds rate remains closer to inflation in order to minimize the risk of an economic slowdown1, so a 50-basis point move makes sense from our perspective. Another benefit of a 50-basis point move, versus what some anticipated to be only a 25-basis point move, is that the relationship between short-term interest rates and longer-term interest rates can normalize. In other words, longer term bonds may have relatively higher rates (yields). Ultimately, this helps lenders who rely on short-term floating rates such as banks to improve their net interest margins and for corporations to manage cash flows. Stock market investors generally view rate lowering by the Fed positively as it is stimulative - unless the market is caught off guard and a large drop in the Fed Funds rate implies that the Federal Reserve decision makers are worried. As a result, the Fed generally tries to do the right thing from an economic perspective while also attempting to communicate properly with the public. In any regard, we remain positive on economic growth and believe the Fed's adjustment is appropriate. . . . The U.S. equity market posted higher in the prior week after the Federal Reserve cut interest rates. Markets reacted positively to the latest monetary policy decision as Fed Chairman Powell’s remarks confirmed the central bank is committed to not falling behinds the curve. Encouraging incoming inflation data has increased the Fed’s confidence that inflation is moving steadily towards the long-term 2% target, allowing the Fed to shift its focus towards the concerns in the labor market. For the week, the S&P 500, Dow Jones Industrial, and Nasdaq rose 1.6%, 1.4%, and 1.5%, respectively. The Russell 2000 advanced 2.1% and the bond aggregate slid -0.3%. Federal Reserve Update - September Federal Open Market Committee (FOMC) Meeting The Federal Reserve concluded its two-day monetary policy meeting on Wednesday, lowering the federal funds rate (the overnight lending rate between banks) for the first time in four years. Instead of the typical quarter of a percentage point (0.25%) cut, the central bank opted to lower the policy rate by a larger half of a percentage point (0.50%), taking the target range down to 4.75% - 5.00% from 5.25% - 5.50%. Heading into the meeting, markets were certain the Fed would begin cutting the policy rate after Chairman Powell already signaled this intention a month prior at Jackson Hole. The change in the balance of risks between the Fed’s dual mandate of price stability and full employment encouraged the shift in policy. Inflation, as measured by the Consumer Price Index (CPI), dropped from a peak of 9.1% in June 2022 to 2.5% in August.2Meanwhile, the unemployment rate increased from 3.4% to 4.2% as of August.3As a result, the focus has shifted to maximum employment and away from inflation which appears to be moving sustainably towards the Fed’s long-term target of 2.0%. The proactive rate cut signals a turning point, a commitment to not fall behind the curve and to increase the likelihood of a soft landing. In addition to the reduction, the committee updated its “dot plot” economic projections, indicating more rate cuts to come by the end of the year, equivalent to 50 basis points or half of a percentage point (0.50%). Most likely, a quarter-point cut in November and another in December. The projections also indicated another full percentage point in cuts by the end of 2025 (4 quarter-point cuts) and two quarter-point reductions in 2026. This would bring the benchmark rate down to 2.9%, a rate at which the Fed officials consider the neutral point. In the post-meeting conference, Powell stated, “We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with this inflation. That’s what we’re trying to do, and I think you could take today’s action as a sign of our strong commitment to achieve that goal.” The committee noted that “job gains have slowed, and the unemployment rate has moved up but remains low”. The dot plot projections suggest the central bank expects the unemployment rate to end the year at 4.4%, higher than the 4% projection at the last update in June. Additionally, the committee has lowered the inflation outlook for the headline rate to reach 2.3% instead of 2.6% and reduced the core inflation expectation by 0.2% down to 2.6%. Outside of a slowdown in hiring, most economic indicators look decently solid specifically for growth (Gross Domestic Product, or GDP) which has been rising steadily and is tracked to show a 3% growth rate in the third quarter, according to the Atlanta Fed. Economic growth has been largely driven by strength in consumer spending. | [1] https://media.ycharts.com/charts/98c401ecb6ec48a4c2175353214bedd6.png [2]Consumer Price Index Summary - 2024 M08 Results (bls.gov) [3]Employment Situation Summary - 2024 M08 Results (bls.gov) | Upcoming Reports Monday: FOMC Member Bostic and Kashkari speaks, Manufacturing PMI, Services PMI Tuesday: FOMC Member Bowman speaks, CB Consumer Confidence, API Weekly Crude Oil Stock Wednesday: New Home Sales, Building Permits Thursday: Gross Domestic Product, Durable Goods Orders, Fed Chairman Powell speaks, Initial and Continued Jobless Claims Friday: Personal Consumption Expenditures (PCE), Personal Spending, Michigan Consumer Sentiment and Expectations, Atlanta Fed GDPNow | Market Performance Stats |  | Thank you for reading. If you have any questions or concerns, or would like to speak with a member of our team, please click the button below to reach out to us. We would love to hear from you! | |
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