Outlook Political pressure to lower interest rates, currently and historically, typically means the administration is asserting that the Federal Reserve (the Fed) should lower its target overnight lending rate it offers to member banks (aka Fed Fund rates) - who in turn facilitate overnight lending to other banks. This overnight lending relationship reverberates throughout the financial system effecting most short-term borrowing activities of corporations, financial institutions, and consumers. Medium and long-term interest rates are affected in part by short-term rates and market expectations. Through open-market operations, the Fed has a strong ability to impact short-term rates. When Fed Fund rates are high, it disincentivizes borrowing activity, which is generally accepted as a way to slow down the economy.
The rate of inflation is the typical benchmark used to determine if the Fed Funds rate is restrictive or accommodative. When the Fed Funds rate is higher than inflation, it is considered restrictive. When it is lower than inflation, the Fed Fund rate is considered to be accommodative. The natural bias and preference for presidential administrations is for the Fed Funds rate to be accommodative, as it is a generally accepted way to stimulate the economy — at the risk of additional inflation. However, the Fed's dual mandate is to aim for full employment and consumer price stability - meaning the Fed is more likely to be restrictive when inflation is a problem and accommodative when employment is less than full. Currently, the Fed Funds policy is restrictive (effective Fed Funds rate of 4.08% vs. 2.92% for CPI inflation).1 So how restrictive is current policy? Historically, dating back to July 1954, it is not very restrictive. Policy has been restrictive 66% of the time when comparing the Effective Fed Funds rate vs. year-over-year Consumer Price Index (CPI). For all months, the Fed Funds policy rate has been higher than inflation by a median of 1.29% vs. the current policy restrictiveness of 1.16%. As a result, current policy is in line with typical historical levels. An independent Fed will typically proceed following the squeaky wheel principle of addressing which is more problematic - employment or inflation. The Fed is also more likely to do nothing if neither wheel is squeaking more. Today, it's not clear that either wheel is squeaking louder given low rates of unemployment and reasonable inflation. As a result, the Fed's current dovish posturing may be putting the Fed's independence in question (for some Fed watchers) in addition to putting inflation risk back on the table. Despite this potential concern laid out above, we believe continued economic growth, decent employment, and moderate inflation levels remain intact - and interpret the above risk as acceptable for now. . . . After nearly nine months of inactivity on monetary policy, the Federal Reserve lowered the fed funds rate by a quarter of a percentage point (0.25%) in the prior week, moving the target range to 4.00 – 4.25%.2 In the press conference, Jerome Powell noted the “downside risks to employment have increased”, shifting the overall balance of risk (between inflation and full employment) in support of the move for a cut.3 Meaning, the central bank is taking proactive action to prevent further slowdown in the labor market, specifically in hiring, or an increase in layoffs. Recent payroll data has pointed to softening in the overall labor market.4 Job creation appears to be running lower than the level needed to keep the unemployment rate constant. Unemployment remains steady near historical lows but is forecasted to rise to 4.5% by year-end and decline to 4.4% in 2026 and 4.3% in 2027.5 Payroll gains have also slowed to roughly 29,000 jobs added on average per month over the past three months. Some of the weaknesses are likely due to lower growth in labor force participation, affected by immigration laws that have resulted in a sharp slowdown in migration into the U.S. While hiring has slowed, it appears so have layoffs. Meanwhile, wage growth has continued to grow, outpacing inflation. The state of the labor market as described by Fed Chairman Powell is currently “unusual,” with softer demand in the supply of and demand for labor. As for the other half of the Fed’s dual mandate, inflation remains slightly elevated (above the Fed’s target of 2.0%) but appears sustainable.6 Year-over-year PCE (Personal Consumption Expenditures) stands at 2.9%, with the central bank forecasting high prices throughout the remainder of the year, then modest decreases in the upcoming years, estimating an inflation rate of 2.6% in 2026 and 2.1% in 2027.5
As for economic growth, the forecasts for GDP (Gross Domestic Product) indicated further expected strength. September’s projections for economic growth rose from June’s projections, forecasting 1.6% growth this year, 1.8% next year, and 1.9% in 2027.5 While the decision for a rate cut at the September meeting was virtually unanimous, views on future policy show a wide disparity. The median expectation from the central bank calls for two additional 25 basis point cuts through the end of the year, with a wider range of expectations thereafter. |
Upcoming Reports Monday: FOMC Member Williams Speaks Tuesday: Fed Chair Powell Speaks Wednesday: Building Permits, New Home Sales, FOMC Member Daly speaks Thursday: GDP, Durable Goods Orders, Existing Home Sales Friday: PCE Price Index, Michigan Consumer Expectations and Sentiment |
Aviance Capital Partnersis a Naples, FL-based registered investment advisor with advisors in Naples and Orlando. We provide professional wealth management,financial planning, and investment strategiessince 2009. Our financial advisors are fiduciaries, offering services such as retirement income planning, tax-efficient investing, and customized portfolio management, all designed to help clients achieve their long-term financial goals. Whether you're preparing for retirement or seeking a tailored investment management strategy,Aviance’s wealth advisorsin Naples and wealth advisors in Orlando provide financial planning and investment management services to investors in all of Florida and beyond. 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! |
