The Week in Review: September 23, 2024
Boom—Fed opts for 50
On Wednesday, the Federal Reserve announced a 50-basis point (bp, 1 bp = 0.01%) rate cut for the Fed funds rate to 4.75 – 5.00%, its first reduction since 2020. The announcement marks the end of the most aggressive rate-hike cycle since 1980 when the Fed funds rate rose a whopping 11 percentage points (1,100 bps) in just six months.
Outside the 1980 experience and 2022-23, 1994-95 has been the fastest, and 2004-06 has been the steepest.
Why did the Fed decide to go big and opt for 50 bps rather than a more modest 25? The decision is aimed at reducing borrowing costs, which supports economic activity. Yet, Fed Chief Powell pointed out during his press conference that the “economy is in good shape.” So, does it need 50?
Well, he used the term “risk management,” which implies that the larger rate cut is a preemptive move—insurance against an economic slowdown.
“The economy is in a good place, and our decision today is designed to keep it there,” he said.
However, he pointed out that the last two employment reports were lackluster, and a recent report highlighted a sharp downward revision of about 800,000 to payroll growth over the previous year. He also strongly implied that more rate cuts are in the pipeline.
“So, we're not waiting for (rising layoffs) because there is thinking that the time to support the labor market is when it's strong, and not when we begin to see… layoffs.”
Theory (or jumping into the weeds)
Monetary policy works with a lag. In other words, rate changes today might not materially affect the economy for an estimated nine to eighteen months. It’s a wide range because each economic cycle is different, and economists can’t directly measure the precise impact of rate changes.
Put another way, the Fed's policymakers are estimating (some would say ‘guestimating’) what economic conditions will be like a year from now.
Get it right and inflation continues to ease, and the economy creates jobs. Reduce rates too slowly, and recession risks may rise. Cut too quickly, and there’s a risk inflation could pick up. While economic variables are in doubt, we control what we can control: the investment portfolio.
We can’t guarantee there won’t be any volatility, but the investment plan helps reduce risk and gives you the best chance of reaching your financial goals.
A year from now, 25 or 50 bps won’t really matter. However, the initial market reaction was favorable. Investors pushed the Dow and S&P 500 Index to new highs on Thursday (MarketWatch), taking Powell at his word that the economic soft landing is still in play.
Market Summary
Two for the Road
A new study from Charles Schwab found that, on average, Americans consider themselves wealthy at $2.5 million, up from $2.2 million two years ago. Americans reported needing an average net worth of $778,000 to feel “financially comfortable,” down from $1 million last year. - Yahoo!finance, August 21, 2024
The 2023 national median cost of a home health aide hired through an agency was $33 an hour, up from $20 an hour in 2015. Those needing round-the-clock in-home care can expect a median cost of about $290,000, more than double the annual median cost of a private room in a nursing home and four times the cost of a private room in an assisted living facility. - The Wall Street Journal, September 4, 2024
Please do not hesitate to contact me with any questions or concerns. I hope you have a wonderful week!
Bill Stordahl, CFP®
Managing Director
Stordahl Capital Management
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1. The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
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5. CME Group front-month contract; Prices can and do vary; past performance does not guarantee future results.
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