And the Fed finally takes action!
•The day has finally come. Fed Chair Powell announced at his press conference last week that the Federal Reserve was cutting the Federal Funds rate by 0.50 percentage points. In the days leading up to the announcement, Wall Street odds had shifted to even on whether the Fed would cut by 0.25 percentage points or by 0.50 percentage points. The market largely rewarded the decision as stocks finished the week on a strong note.
•Moving forward it is currently being projected that the Fed will cut at least one, maybe two more times by the end of the year, for a potential of 1.25 percentage points in total rate decreases. Expectations are that these rate reductions will help ease businesses’ lending expenses, aid consumer’s inflation-stretched budgets, and potentially slow the recently climbing unemployment rate.
•One effect of the central bank raising the Fed Funds rate so high was that it created an inverted yield curve, i.e., that short term interest rates were in the unusual position of being higher than long term rates. Now, anticipating the recent rate cut to the Fed Funds rate, the yield curve has started to return to its more typical upward slope as bond maturities lengthen. With a normalized yield curve, higher yields compensate for the increased risk involved in long-term loans and the lower risks associated with short-term investments.
•Later this week, the Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE), will be released. The market is anticipating a reading of a 2.7% annualized increase – similar to the readings of the last few months. As stated previously, the market has largely deemed the battle over inflation won. Now, it is to be determined whether unemployment can stop its gradual increase over the last 12 months and if the economy can actually stick a much hoped for “soft landing.”